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

Abstract

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.