Moving from Input-based to Output-based Pricing - Why, When, and How?

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Introduction

Pricing is an integral aspect of any outsourcing relationship. It is frequently complex in nature, with the result that a large outsourcing relationship is usually a hybrid of multiple pricing models. Buyers explore transitions in pricing models in order to satisfy the need to reduce total cost, improve control on quality of service, increase flexibility, or improve risk management. This research focuses on understanding the motivations, challenges, and roadmap for implementing a transition from input-based to output-based pricing.

The research provides a buyer’s perspective of the challenges and risks associated with switching from input-based to output-based pricing and a practical approach to implement this transition. Companies will benefit by understanding the key motivations for adopting a pricing model and therefore the reasons for seeking a transition to another pricing model.

Scope

  • Key supplier and buyer motivations for transitioning to a new pricing model
  • Buyers’ risks and challenges in shifting from input-based to output-based pricing model
  • A phased roadmap for transition from input-based to output-based pricing model, with a discussion of key activities at each stage

Contents

This research focuses on understanding the motivations, challenges, and roadmap for implementing a transition from input-based to output-based pricing. The key insights are presented in four sections: introduction to pricing models, motivation for switching pricing models, challenges and implications of pricing transition, and a practical approach to enable transition. For instance, the third section discusses the different dimensions of challenges faced in a pricing transition from the input-based to the output-based model:

Trends 

  • Complexity: Setting up output-based pricing is more difficult than other pricing models
  • Volume uncertainty: Predicting future volumes,  providing a minimum commitment and  lead time for absorbing volume variations are the key challenges
  • Process scope: the new pricing model can impact different functions within the IT organization. Each function has to be examined to determine the impact of switching to the new pricing model
  • Organizational change: Internal BUs as well as the corporate finance division are often impacted in a pricing change
 
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