Designing Professional Services: Pricing and Priorities
40 Pages Posted: 7 Nov 2018 Last revised: 16 Dec 2020
Date Written: October 29, 2018
Problem Definition: We explore how to design professional services in markets that cater to customers with differential usage capabilities. Professional customers avail the service and tailor it to their use, whereas amateur customers, lacking the relevant expertise, obtain the service through a third-party intermediary. Such differential service is germane to the burgeoning industry of Infrastructure as a Service (IaaS), such as the cloud computing service, where professional customers build their own computing infrastructure to meet their needs. The configuration of such infrastructure, however, is technically challenging to amateur customers, who therefore procure the service through an intermediary. Academic/Practical Relevance: Much of the existing literature on service operations focuses on services that can be readily used upon a purchase. Our paper examines a novel perspective, as little is known about how to optimally position professional services to markets mixed with professional and amateur customers. Methodology: We develop a queuing-game-theoretic model to study such services. Results: We identify the proportion of amateur customers as a critical driver of equilibrium outcomes, prices, and revenue. If a single price is enforced, a sufficient base of amateur customers allows professional customers to "free-ride". Price discrimination allays free-riding but may drive prices downward compared to the optimal single price. Typically, firms prefer the high profit margin conferred by professional customers. Despite this preference, reallocating capacity to prioritize amateur customers can bring additional revenues and improve social welfare relative to the First-Come-First-Serve policy or prioritizing professional customers. Managerial Implications: Our results offer normative guidelines for managing professional services, clarifying regimes for exclusive servicing, price discrimination, and prioritization. For instance, we advocate that prioritizing amateur customers can lead to improved market coverage and a higher utilization of server capacity.
Keywords: service operations, queuing game, professional service, pricing, priority
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