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Optimal Pricing of “Software as a Service” with Risk Considerations

Damangir, Sina | 2009

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  1. Type of Document: M.Sc. Thesis
  2. Language: Farsi
  3. Document No: 39542 (44)
  4. University: Sharif University of Technology
  5. Department: Management and Economics
  6. Advisor(s): Sheikhzadeh, Mahdi
  7. Abstract:
  8. The recent advances in communications and processing technologies have paved the way for a new business model in IT industry. In this new model, frequently called “software as a service” or in short SAAS, software is hosted on servers operated by a software vendor instead of customers and all required transactions take place through the network, especially through World Wide Web. There are several differences between traditional business models and SAAS, including pricing and revenue model. Given the fact that vendor’s can monitor the customer usage, new and more complicated price structures such as usage-based pricing is possible, In this new business model. Although this pricing structure benefits both customers and vendors, it leads to a more difficult decision on pricing. That is why several publications have been devoted to different aspects of SAAS pricing, in recent years. However, none has investigated what the optimum structure and level of price would be if the risks in the market are considered. In this thesis, a pricing model for SAAS considering the risk is developed. Using this model, one can find the effect of changes in parameters of two-part-tariff structure, on the firm’s profit expected value and its standard deviation. Moreover, the optimal pricing policies for a risk-averse firm are derived. Among findings, two primary conclusions of this thesis are as follows. First, in two-part-tariff policy, increasing the weight of usage-based pricing over fixed price can reduce the firm’s risk, although it has little effect on expected profit. Second, recommendations of previous publications analyzing either deterministic situation or risk neutral firm cannot be generalized to the case where uncertainty exists and firm is risk averse.
  9. Keywords:
  10. Pricing ; Market Risk ; Uncertainty ; Software as a Service ; Firm Facing Uncertainty

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