Usage-Based Pricing of Software Services Under Competition

Journal of Revenue and Pricing Management (2010) 9, 204–216. doi:10.1057/rpm.2010.12

14 Pages Posted: 12 Nov 2013

See all articles by Ram Bala

Ram Bala

Santa Clara University - Leavey School of Business

Scott M. Carr

LECG - Washington, DC

Date Written: November 11, 2013

Abstract

With the emergence of high speed networks, software firms have the ability to deploy 'software as a service' and measure resource usage at the level of individual customers. This enables the implementation of usage-based pricing. We study both fixed and usage-based pricing schemes in a competitive setting where the firm incurs a transaction cost of monitoring usage if it implements usage-based pricing. Offering different pricing schemes helps to differentiate the firms and relax price competition, particularly at higher monitoring costs, even when competing firms offer the same service quality. However, the low usage customers acquired by offering usage-based pricing are unable to compensate for the monitoring costs incurred. This implies that managers should be cautious about implementing usage-based pricing in a competitive setting.

Keywords: pricing; competitive strategy; game theory; software industry

Suggested Citation

Bala, Ram and Carr, Scott M., Usage-Based Pricing of Software Services Under Competition (November 11, 2013). Journal of Revenue and Pricing Management (2010) 9, 204–216. doi:10.1057/rpm.2010.12 . Available at SSRN: https://ssrn.com/abstract=2352995

Ram Bala (Contact Author)

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States

Scott M. Carr

LECG - Washington, DC ( email )

1725 Eye Street, NW
Suite 800
Washington, DC 20006
United States

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