A consumption-based pricing model specifically relies on the fundamental philosophy that customers need to pay according to the amount or number of a particular service they are preferring or consuming. However, this is believed to be a leading pricing models in cloud computing services and other types of IT vendor services as it is easier to track. This whitepaper includes in-depth understanding on pricing model, and is also a coverage of two major pricing models which are linear and nonlinear pricing model usually used at a higher level. Moreover, it also offers learning about how to identify the best pricing model to the requirement at IT services and keep IT expenditure on track.

A consumption-based pricing model specifically relies on the fundamental philosophy that customers need to pay according to the amount or number of a particular service they are preferring or consuming. However, this is believed to be a leading pricing models in cloud computing services and other types of IT vendor services as it is easier to track. This whitepaper includes in-depth understanding on pricing model, and is also a coverage of two major pricing models which are linear and nonlinear pricing model usually used at a higher level. Moreover, it also offers learning about how to identify the best pricing model to the requirement at IT services and keep IT expenditure on track.

What is consumption-based pricing model?

The approach with a consumption based pricing model is clear and easy. Vendor businesses quantifies the services they provide, and offer a charges according to the standard services costing. For example, a particular internet package can charge a fix amount of a particular service and can be valid for a particular time period. Services that are provided in real time may charge per minute or hour. If you are using an internet in an internet café, then café owner would offer per minute or hourly based costing for the use of broadband services through IPSs.

Understanding on Pricing Models

A pricing model for an IT service basically refers to the official agreement between a service provider and a service gainer, where an agreement is formed based on the type of service the parties engage in. In today’s time, pricing models in the IT industry have promptly matured from the traditional T&M and FP models to the modest managed services or outcome based models.

To reach the pricing model into a succession, it should compulsorily conclude the balanced level between the customer’s expectations of quality, price, and timelines including the service provider’s cost and operational efficiency. Customer engagements may not be successful with one type of pricing model.

Linear Pricing Models

Linear pricing models is basically based on the relationship between time and material. The service provider is paid based on the resource provided or the effort spent for the required duration of agreed time.

Linear pricing models holds an essential sub category described below:

1. Dedicated team: This is the dedicated team who contributes the efforts as a dedicated service provider for a specific period of time. This team acts as the virtual extension of the client’s in-house development team. The company grabs the bonus of getting work done effectively in a specific period of time from the team. The bright side of dedicated team model consists an in-depth knowledge and flexibility of the utilizing several requirements. Monthly bills are raised based on the number of resources dedicated every month.
2. Time and Material (T&M): The time and material model operates a customer friendly who is looking forward to work on agile project execution flexibly. Here they play a greater role in the development of the software product or solution. In this model the customer carries virtually all the related risks of scope, project management, and quality of deliverables. There are minimum risk factors with minus to any investments associated by service providers.
3. Fixed Price (FP): Fixed price models allow customers to pay a fixed price for a project that is agreed upon by both the parties. This model works where it can deliver crystal clear specifications and innovative ways at the initial level of project and ask for system requirements if any.

Non Linear Pricing Models

Non-linear pricing models completely separate the relationship between effort and rate. Basically, T&M and FP do not offer a promising scope for changes and modification. However, service providers have promptly realized the need to be flexible to satisfy their customers. This has led introduce unique innovations and advancements in pricing models that fit suitable varying needs.

1. Hybrid Model: The hybrid model efficiently uses T&M techniques to anticipate costs for projects that has absence of clear-cut goals or detailed and complete requirements on the initial basis. This hybrid pricing model has the best features of both the models- T&M and FP. Also, it prominently allows services providers to deploy resources as in the T&M model, but maximum projects are implemented according to the FP model. Hence, the project has a well aligned processes, and a smooth workflow.
2. Managed services model: The managed services model consists of a service delivery at a fixed cost rate. Previously, value was taken into a consideration according to the performance and how well it was managed by service providers, and how well it has been delivered to the customers. This process was more qualitative in nature.
3. Outcome-based pricing model: The basic philosophy of this model is to align the interests of the service provider and the customer so that both work towards the same goal. This model has several opportunities to the bag the better business outcome itself. The model is designed with the policies of a clear definition and fix standard outcomes which can be measure and delivered for a allotted project which is however critical to its success. In an outcome-based model, resource loading, costing and pricing is a complicated exercise.

Due Diligence: Best fit to identify pricing models

Very often, pricing models completely depends on the decision of customership, based on experience with other service providers, or influenced by their ability to get the work done in limited period of time. It needs to match the maturity levels of the both service providers as well as customers. There has to be a decision framework, to help both the service provider and the customer, to assess and finally decide on the best suitable pricing model. This is generally based on various parameters such as engagement/service types, enterprise maturity level, working experience, relationship of engagement, duration, service type, enterprise maturity level, mutual benefit, objective/goals /agenda of the engagement at hand. These key parameters and decision making framework/guidelines have been followed from the starting when the customer is new. Engagement or project is worked upon at the RFI or RFP stage.

Conclusion

Customers will always search for minimum risk, minimum capital investment, and high quality of service at affordable budget. Moreover, consumer should also expect the work with a maximum price flexibility and transparency. Furthermore on the other hand, service providers will look forward to witness minimum financial and operational risk, long term contractual agreement with a commercial viability, and constant predictable profit and revenue growth. Creating an effective pricing model is to help in aligning the interests of the customer and service provider. Moreover, it should be representative of business realities, and maximum benefits for both the parties, competitive and profitable, accessible, flexible, and easy to apply. The due diligence is usually based on scientific methods with known parameters across IT industry.