Designing Professional Services: Pricing and Priorities

40 Pages Posted: 7 Nov 2018 Last revised: 16 Dec 2020

See all articles by Chen Jin

Chen Jin

National University of Singapore

Senthil K. Veeraraghavan

University of Pennsylvania - The Wharton School - Operations, Information and Decisions

Chenguang (Allen) Wu

Hong Kong University of Science and Technology

Date Written: October 29, 2018

Abstract

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

Suggested Citation

Jin, Chen and Veeraraghavan, Senthil K. and Wu, Chenguang (Allen), Designing Professional Services: Pricing and Priorities (October 29, 2018). Available at SSRN: https://ssrn.com/abstract=3274400 or http://dx.doi.org/10.2139/ssrn.3274400

Chen Jin (Contact Author)

National University of Singapore ( email )

13 Computing Drive
Singapore, 117417
Singapore

Senthil K. Veeraraghavan

University of Pennsylvania - The Wharton School - Operations, Information and Decisions ( email )

Philadelphia, PA 19104
United States

HOME PAGE: http://https://oid.wharton.upenn.edu/profile/senthilv/

Chenguang (Allen) Wu

Hong Kong University of Science and Technology ( email )

Room 5559C, Academic Building
HongKong University of Science and Technology
Hong Kong
Hong Kong

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