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A Pricing Model for AIaaS

An analysis of a new AI personalization product within the edtech space

Written by Z. Jefimova, S. Nabseth

Paper category

Master Thesis

Subject

Business Administration>Management

Year

2018

Abstract

Master Thesis: Pricing Models Generally speaking, pricing models can be divided into the following three categories: cost is based on cost accounting, competition is based on observed or expected price levels of competitors, and value is based on the value delivery of products or services to specific customer groups (Hinterhuber, 2008 ). Value-based pricing is centered on the customer's perception of the value of the product and focuses on the development of long-term customer value. In contrast, cost-based pricing focuses on product costs, focusing on short-term supplier value, and competition-based pricing focuses on market prices. Figure 2 illustrates the conflict between cost-based and value-based pricing models (Harmon et al., 2004). For digital goods, cost-based pricing is useless due to its special cost structure, but it can be said that it is more suitable for SaaS products. According to the market structure, competition-based pricing may be suitable for some companies that provide digital products. In addition, there are auctions, which is another form of pricing commonly used by Internet advertising companies. This depends on the degree of customer interaction, which is high in auction-based pricing models. Auctions generally have little meaning for digital goods and software products. (Lehmann & Buxmann, 2009) Value-based pricing is increasingly recognized in the literature and practitioners, because people recognize that sustained profitability depends on understanding the source of customer value creation, designing products that meet customer needs, and setting Value-based on price (Hinterhuber, 2008). Generally speaking, this pricing strategy reveals the customer's perception of the company's product value (Ingenbleek, et al., 2003). Customer satisfaction from using a service or product usually refers to the term value. Nagel et al. (2013) wrote two of the four forms of value mentioned earlier that require different estimation methods: currency and psychology. The former represents the increase in total revenue or cost savings that customers obtain from the purchase of products. Generally speaking, currency value is considered to be the most important factor in many B2B purchases, because the supplier's service or product supply can be converted into tangible cost savings for customers, so that the product has a high monetary value. On the other hand, there are also some products that do not have real monetary benefits for customers, but create internal satisfaction and pleasure, which is a typical feature of psychological value. In some cases, two types of value can be created, which makes it difficult to determine which of these two values ​​is most important to the purchase decision (Nagle et al., 2013). 2.5.2 New product pricing Iveroth et al. (2013) Created a five-dimensional pricing model called SBIFT based on a case study of telecommunications company Ericsson. The SBIFT model is very suitable for rapidly changing industries, such as the telecommunications industry. Due to the wide variety of products, the rapid development of the industry, and the complex pricing. First, the SBIFT model was invented for organizations to differentiate their products by price. Five dimensions; Scope, Base, Influence, Formula and Temporal Rights, establish the underlying model of the price model, which can be used to explain and describe a company's price model. However, in addition to the five dimensions, there are some additional agreements for sellers and buyers to consider. In addition, the model needs to be supplemented with scenario analysis to track and anticipate changes in customer needs. Finally, in a business ecosystem, different participants will influence each other. Therefore, a price model should be compared with other price models used by participants in a particular ecosystem to imagine the possible impact of certain price model changes. (Iveroth, et al., 2013) 2.5.3 Performance-based pricing Results-based pricing or performance-based pricing (PBP) is based on the idea that after the customer can determine the actual outcome of the product or service, the seller Getting paid is becoming more and more common. Many industries used to set prices based on service costs, but now they are turning to PBP, and the deliverer must work toward the set goals. This pricing method is suitable for industries such as marketing, construction, consulting, and heavy industry. (Shapiro, 2002) One of the many benefits of PBP is that the alignment between buyer and seller goals will eventually become uniform. In addition, PBP provides guarantees to the buyer because the seller guarantees that it will not be delivered or that the seller will not be compensated. This becomes similar to insurance, where the buyer can pay more and get higher deliverables and minimize the risk of overpaying for undesired results. Finally, the third benefit of PBP is the degree of participation imposed on both parties. Generally, PBP is used in complex situations with intricate and conflicting goals. Unlike traditional contracts, PBP allows both parties to participate in the discussion and must understand each other's goals in order to set a corresponding fair price. Then, the buyer and the seller can focus on common goals, thereby reaching a better agreement and reducing the seller’s unexpected costs. (Shapiro, 2002) Like any other pricing model, PBP has disadvantages. Read Less