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Price-at-Risk: A methodology for pricing utility computing services

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1 Author(s)
Paleologo, G.A. ; IBM Thomas J. Watson Research Center, P.O. Box 218, Yorktown, NY 10598, USA

Whereas most companies use the century-old cost-plus pricing, this pricing method is especially inadequate for services on demand because these services have uncertain demand, high development costs, and a short life cycle. In this paper we propose a novel methodology, Price-at-Risk, that explicitly takes into account uncertainty in the pricing decision. By explicitly modeling contingent factors, such as uncertain rate of adoption or demand elasticity, the methodology can account for risk before the pricing decision is taken. The methodology optimizes the expected “net present value,” subject to financial performance constraints, and thus improves on both the cost-based and value-based approaches found in the marketing literature.

Note: The Institute of Electrical and Electronics Engineers, Incorporated is distributing this Article with permission of the International Business Machines Corporation (IBM) who is the exclusive owner. The recipient of this Article may not assign, sublicense, lease, rent or otherwise transfer, reproduce, prepare derivative works, publicly display or perform, or distribute the Article.  

Published in:

IBM Systems Journal  (Volume:43 ,  Issue: 1 )