An ontological approach for the use of pricing models to sell services Master thesis in Information Sciences

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An ontological approach for the use of

pricing models to sell services

Master thesis in Information Sciences

Benito de Miranda Vrije Universiteit

Amsterdam, The Netherlands [email protected]

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Preface

This Master thesis is the result of several months of research. It is the final product of the Information Sciences study at the Vrije Universiteit in Amsterdam, the Netherlands. Two people have supervised this research:

Z. Baida, M.Sc. Vrije Universiteit

Faculty of Sciences, department of Business Informatics de Boelelaan 1081a 1081 HV Amsterdam The Netherlands dr. ing. J. Gordijn Vrije Universiteit

Faculty of Sciences, department of Business Informatics

de Boelelaan 1081a 1081 HV Amsterdam The Netherlands

Acknowledgements

I hereby would like to thank my mentor Ziv Baida very much for his support, feedback and patience throughout the process of this work. I also want to thank Jaap Gordijn for his valuable contributions to this research. Very special thanks are dedicated to my partner Yacine Diallo for the guidance, insight and direction she has provided me with. Furthermore, I want to thank Edward van Meeuwen for his useful tips. Last but not least, I want to thank my family and friends for their support in this final stage of my studies.

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Management summary

The goal of this research is to investigate the way pricing models of services can be incorporated in the service ontology, which has been developed by Baida et al. (2003). An ontology is a formal representation of a domain, and serves as an important tool in making domain knowledge machine-readable. In the context of this research, services are considered to be business activities, deeds and performances that often result in intangible outcomes or benefits.

The aforementioned service ontology has been developed with the focus on service bundles to realize two goals, which will be discussed in the next two paragraphs. A service bundle is a ‘package’ of two or more elementary (single) services, possibly offered by multiple suppliers. Pricing models were not incorporated in the first version of the service ontology, however, these play an important role in both goals. This will be explained for each goal.

First goal: The realization of complex online service of erings (e services) f

-E-services are considered to be services (as described in the first paragraph) where the Internet is used as a channel to interact with customers. Nowadays, businesses offer their services more and more via Internet, either parallel to or instead of the traditional channels. Statistics show an immense growth in the percentage of households with Internet access that actually shop online. These statistics also show the dominant and growing role and the importance of e-services in a variety of industries. In the first goal, supply side and also demand side business logics are used to make the decision to offer certain e-services (single or bundled) to a customer. Information on the price of a service, which is present in the pricing model, is required for selling that service. Thus, when pricing models are incorporated in the service ontology, a business can sell e-services by employing this ontology.

Second goal: Performing business analyses of e-service bundles for networked enterprises

In order to perform such analyses, the design and assessment of a business model is required. In other research, a conceptual modeling approach has been developed, which helps reach a better understanding of the business model and enables an assessment of the profitability of the suggested models. This modeling approach is expressed in an ontology, which is used together with the service ontology in order to achieve the second goal. In this goal, the service ontology is necessary to design feasible service bundles. When these two ontologies are used together and pricing models are incorporated in the service ontology, it is possible to calculate the eventual cash flow when performing business analyses of e-service bundles for networked enterprises.

In this research, a proposal to incorporate pricing models of both elementary (single) services and service bundles in the service ontology is discussed. The above mentioned goals highlight the importance of incorporating pricing models in the service ontology: selling e-services and calculating the eventual cash flow when performing business analyses of e-service bundles for networked enterprises.

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Table of contents PREFACE___________________________________________________________________ 3 ACKNOWLEDGEMENTS _______________________________________________________ 3 TABLE OF CONTENTS ________________________________________________________ 5 CHAPTER I INTRODUCTION _______________________________________________ 8 1.1 PROBLEM STATEMENT ______________________________________________________ 8 1.2 DEFINITIONS____________________________________________________________ 8 1.3 THE GOAL ______________________________________________________________ 9 1.4 RESEARCH METHODOLOGY ___________________________________________________ 9

CHAPTER II LITERATURE OVERVIEW _ 10 2.1 PRICING MODELS OF ELEMENTARY SERVICES 10

2.1.1 PRICING MODELS OF ELEMENTARY SERVICES IN GENERAL____________________________ 10

2.1.2 PRICING MODELS OF VARIOUS SPECIFIC ELEMENTARY SERVICES________________________ 11

2.1.3 PRICING MODELS OF INFORMATION GOODS _____________________________________ 16

2.2 GROUPING OF THE PRICING MODELS OF ELEMENTARY SERVICES_________________________ 18

2.3 PRICING OF SERVICE BUNDLES _______________________________________________ 19

2.3.1 THE STRATEGY OF BUNDLING_______________________________________________ 20

2.3.2 PRICING MODELS OF SERVICE BUNDLES________________________________________ 21

2.3.3 EXAMPLES OF PRICING MODELS OF SERVICE BUNDLES FROM PRACTICE___________________ 22

2.3.4 TWO WAYS TO CALCULATE THE PRICE OF SERVICE BUNDLES__________________________ 23

2.4 MATHEMATICAL REPRESENTATION OF THE PRICING MODELS____________________________ 24

2.4.1 ANALYSIS OF A MATHEMATICAL FORMULA_______________________________________ 24

2.4.2 FORMULAS OF THE PRICING MODELS OF ELEMENTARY SERVICES AND SERVICE BUNDLES _______ 25

CHAPTER III CASE STUDIES ______________________________________________ 27 3.1 THE SINTEF CASE STUDY __________________________________________________ 27

3.1.1 COMPARISON OF THE TEXTUAL REPRESENTATIONS ________________________________ 28

3.1.2 COMPARISON OF THE MATHEMATICAL REPRESENTATIONS____________________________ 31

3.1.3 RESULTS OF THE SINTEF CASE STUDY________________________________________ 34

3.2 THE SENA CASE STUDY____________________________________________________ 35

3.2.1 COMPARISON OF THE TEXTUAL REPRESENTATIONS________________________________ 36

3.2.2 COMPARISON OF FORMULAS USED IN THE SENA CASE STUDY_________________________ 37

3.2.3 RESULTS OF THE SENA CASE STUDY__________________________________________ 37

3.3 CONCLUSIONS OF THE CASE STUDIES___________________________________________ 37

CHAPTER IV THE ONTOLOGIES _ 39 4.1 THE SERVICE ONTOLOGY_________ 39

4.1.1 THE SERVICE OFFERING PERSPECTIVE________________________________________ 40

4.2 THE E³-VALUE ONTOLOGY__________________________________________________ 46

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CHAPTER V PROPOSAL TO INCORPORATE PRICING MODELS IN THE SERVICE

ONTOLOGY __________________________________________________ 51 5.1 WHY INCORPORATE PRICING MODELS IN THE SERVICE ONTOLOGY?_______________________ 51

5.2 RELATIONSHIPS OF THE MODEL PROPOSAL_______________________________________ 53

5.2.1 RELATIONSHIP BETWEEN THE PRICING MODEL CONCEPT AND THE PROPERTY CONCEPT________ 53

5.2.2 RELATIONSHIP BETWEEN THE PRICING MODEL CONCEPT AND THE SERVICE PORT CONCEPT_____ 54

5.2.3 RELATIONSHIP BETWEEN THE PRICING MODEL CONCEPT AND THE SERVICE PORT CONCEPT WHEN DEALING WITH ELEMENTARY SERVICE ELEMENTS__________________________________ 55

5.2.4 RELATIONSHIP BETWEEN THE PRICING MODEL CONCEPT AND THE SERVICE PORT CONCEPT WHEN DEALING WITH SERVICE BUNDLES____________________________________________ 56

5.2.5 RELATIONSHIP BETWEEN PRICING MODEL AND SERVICE PORT CONCEPT TO SUPPORT THE FIRST WAY TO CALCULATE THE PRICE OF SERVICE BUNDLES __________________________________ 57

5.2.6 RELATIONSHIP BETWEEN THE PRICING MODEL CONCEPT AND THE LINK CONCEPT___________ 58

5.2.7 RELATIONSHIP BETWEEN PRICING MODEL AND LINK CONCEPT TO SUPPORT THE SECOND WAY TO CALCULATE THE PRICE OF SERVICE BUNDLES_____________________________________ 59

5.3 EXTENSION OF THE MODEL PROPOSAL__________________________________________ 61

5.4 INCLUDING USEFUL INFORMATION ABOUT THE DIFFERENT TYPES OF PRICING MODELS__________ 63

5.5 KEY NOTES OF THE MODEL PROPOSAL___________________________________________ 64

5.6 MODEL PROPOSAL IN AN EARLIER STAGE OF THE RESEARCH____________________________ 64

CHAPTER VI PROPOSAL TO INCORPORATE PRICING MODELS IN A SOFTWARE TOOL65 6.1 REASONING ABOUT THE PROPOSAL ____________________________________________ 65

6.2 PROPOSAL TO INCORPORATE PRICING MODELS OF SERVICE ELEMENTS THAT ARE PART OF A SIMULATED SERVICE BUNDLE_________________________________________________________ 66

6.2.1 FIRST FUNCTIONALITY:‘SIMULATE BUNDLE’ _____________________________________ 66

6.2.2 SECOND FUNCTIONALITY:‘EDIT/ASSIGN PRICING MODELS OF SERVICE ELEMENTS THAT ARE PART OF A SIMULATED BUNDLE’____________________________________________________ 67

6.2.3 REPRESENTATION OF AND THE VALUES USED IN THE PRICING MODELS___________________ 69

6.3 MAPPING BETWEEN SIMULATED AND CONFIGURED SERVICE BUNDLES _____________________ 69

6.4 ALGORITHM TO CALCULATE PRICES OF BOTH ELEMENTARY SERVICE ELEMENTS AND SERVICE BUNDLES IN THE SERVICE TOOL _______________________________________________________ 70

CHAPTER VII MAPPING BETWEEN THE SERVICE ONTOLOGY AND THE E³-VALUE

ONTOLOGY __________________________________________________ 74 7.1 MAPPING FROM THE SERVICE ONTOLOGY TO THE E³-VALUE ONTOLOGY____________________ 75

7.1.1 MAPPING OF AN ELEMENTARY SERVICE ELEMENT INTO THE E³-VALUE ONTOLOGY____________ 75

7.1.2 MAPPING OF A SERVICE BUNDLE INTO THE E³-VALUE ONTOLOGY_______________________ 77

7.1.3 CONCLUSIONS OF THE MAPPING FROM THE SERVICE ONTOLOGY TO THE E³-VALUE ONTOLOGY___ 80

7.2 MAPPING FROM THE E³-VALUE ONTOLOGY TO THE SERVICE ONTOLOGY____________________ 81

7.2.1 MAPPING OF AN ELEMENTARY ACTOR INTO THE SERVICE ONTOLOGY ____________________ 81

7.2.2 MAPPING OF A COMPOSITE ACTOR INTO THE SERVICE ONTOLOGY ______________________ 82

7.2.3 CONCLUSIONS OF THE MAPPING FROM THE E³-VALUE ONTOLOGY TO THE SERVICE ONTOLOGY___ 83

7.3 PROBLEMS WITH PRICING MODELS IN THE E³-VALUE ONTOLOGY_________________________ 84

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8.3.1 VALIDATING THE MODEL PROPOSAL FOR ELEMENTARY SERVICE ELEMENTS_________________ 91

8.3.2 VALIDATING THE MODEL PROPOSAL FOR SERVICE BUNDLES___________________________ 94

8.4 CONCLUSIONS OF THE VALIDATION ____________________________________________ 98

CHAPTER IX CONCLUSION ______________________________________________ 100 LIST OF FIGURES__________________________________________________________ 101 LIST OF TABLES ___________________________________________________________ 102 REFERENCES _____________________________________________________________ 103

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Chapter I Introduction 1.1 Problem statement

Core elements of this research are pricing models and version 1.0 of the service ontology developed by Baida et al. (2003). The service ontology formally describes a shared view on what services are and aims to compose (or: configure) complex services out of more elementary (single) services possibly supplied by different suppliers. Version 1.0 of this ontology does not support pricing models. However, it is reasonable to assume that if a service has no price, it cannot be sold. The price of an elementary service may depend on the amount consumed (usage-based pricing model), or consist of a fixed amount plus an additional usage based charge (two-part tariff pricing model). When services are bundled, the resulting bundle may have a different price than the sum of the prices of the services that are part of the bundle. This is one of the reasons to bundle services. Consider the following cases:

• If a customer buys 25.000 KWh of electricity per year, he pays M euros. However, if he buys 50.000 KWh per year as a bundle, he will only pay 1.8 x M, instead of 2 x M.

• Service X costs €1000, service Y costs €1500, and service Z costs €2000. If X is bundled with Y, the price of X will be €800 instead of €1000. However, if X is bundled with Z, the price of X will be €700 instead of €1000.

Therefore, the following problem is formulated:

Version 1.0 of the service ontology does not suppor the modeling of p icing models of both elementary services and service bundles, while these models are necessary to reason about the price and the selling of these services.

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In this research, the types of pricing models of services and the way they are constructed is examined. Moreover, it is verified if they are representative for services in practice. These two aspects serve as a basis to find a suitable proposal to incorporate pricing models in version 1.0 of the service ontology.

1.2 Definitions

This section gives the definitions of frequently used terms throughout this research. Pricing model and pricing strategy

A pricing model is “a representation of the way a company plans to set its prices” (Daly 2002). In other words, a pricing model is a representation of the way a price is derived, and is closely related to a pricing strategy. According to Lovelock (2001), “the founda ions of a pricing s rategy are costs, competition and value to the customer”. Lovelock (2001) further states that the price of a service must be based on these three elements. The upper limit of the price is determined by the value to the customer, while the lower limit of the price is determined by the organizational costs. The price charged by the competitors should also be taken into account. Thus,

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Service and product

The interpretation of the term service used in this research is business activities, deeds and performances that often result in intangible outcomes or benefits, as described in various textbooks about service management and marketing (Grönroos 2000, Kotler 1988, Lovelock 2001, Zeithaml and Bitner 1996). Some examples of services are insurances, transportation, Internet access and conference organizing. According to Payne (1993), when discussing products and services there is often confusion over terminology. Payne (1993) defines a product as “an overall concept of objects or p ocesses which provide some value to customers”. Goods and services are subcategories which describe two types of products. Therefore, the term product is frequently used in a broad sense to indicate manufactured goods and services. In this research, the term product refers to both services and manufactured goods.

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t Bundling and service bundle

Bundling is defined as “the practice of marke ing two or more goods or services in a single package for a special price” (Guiltinan 1987). Furthermore, a service bundle is “a ‘package’ of two or more elementary (single) services” (Grönroos 2000), which can possibly be offered by different suppliers.

1.3 The goal

The problem statement is the initiation of this research. Solving this problem requires knowledge of what types of pricing models of services there are and the way they are constructed. The goal of this research is to investigate the way pricing models of services can be incorporated in the service ontology.

1.4 Research methodology

An extensive study of the services marketing literature, with the focus on pricing, was conducted to gain more insight in what types of pricing models of services there are, and the way they are constructed. This literature yielded very little information on the way service bundles are priced in practice. Therefore, examples from practice were used to gain a better grip on that subject. All these findings generated input for the main issue of this research: investigating the way to incorporate pricing models in the service ontology. In an earlier phase of the research, a model proposal was suggested, but it was soon discovered that this approach had several shortcomings. A second and more elaborate proposal was developed in a later stage, which yielded very fruitful results. This proposal was validated by testing if the results from the literature study were representative for services in practice, and if pricing models of these services can be modeled in accordance with the model proposal.

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Chapter II Literature overview

In order to incorporate pricing models in the service ontology, it is necessary to understand what types of pricing models of services there are and the way they are constructed. This chapter presents an overview of pricing models of services, which is based on the services marketing literature with the focus on pricing. The first section will discuss pricing models of elementary (single) services, and information goods. The studied literature discusses different types of pricing models of elementary services which are often referred to with different names, although their representations are similar. As a result, the second section will describe a grouping of these pricing models. This will be followed by the third section that will discuss pricing models of service bundles. The fourth and final section will describe the mathematical representations of the most broadly used types of pricing models of services (elementary and bundled).

2.1 Pricing models of elementary services

2.1.1 Pricing models of elementary services in general Dolan and Simon (1996) discuss the following pricing models:

• Two-part tariff: consists of a fixed price and an additional price per unit. This form is typical for a telephone company offering a fixed price and a price per service unit. Another example is a purchasing club, where members pay an annual membership fee and can buy services at a lower price.

• Two-block tariff: a price per unit (p) is charged for any units, up to a certain quantity (q2), and then the price per-unit changes to (p2) for all units greater than (q2). The two-block tariff model is often used in transportation and utility services.

• Different variant of two-block tariff (with two two-part tariffs combined): each of the two blocks has a fixed and variable price component. This pricing model is often used by mobile providers and utilities. For example, an electricity supplier can offer the following options:

o Tariff A has a fixed price of €4.0 and a variable part of €0.6 per 100 kWh

o Tariff B has a fixed price of €10.0 and a variable part of €0.2 per 100 kWh

According to Dolan (1987), the n-block tariff (with n > 2) pricing model is defined similar to the two-block tariff model.

Simkovich (1998) mentions the multi-dimensional pricing model, and argues that it is often used by telephone companies. In this pricing model, the customer no longer pays a single price for the service, but two or more prices: a flat monthly fee plus a certain price per unit. Daly (2002) states that an activity based pricing model (ABPM) is developed to help management determine the real costs of a product, in order to establish a suitable price. According to Daly (2002), ABPM is used by service businesses which offer professional services such as accountancy, consultancy and audits. These service businesses often use a pricing model based on a work program list of the tasks to be performed, a list of the hours required to

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Berends (2004) gives a view on several pricing models of services:

• Fixed price: a fixed price for a certain service.

• Commission: a commission is a percentage fee or fixed fee that is paid only if a service is successful.

• Time and material: the actual cost of labor and material is paid according to agreed labor rates and material costs. For example, a cable TV repair service is based on €/hour plus additional fixed price for cables, switches, etc. In order to facilitate reasoning about the described pricing models, it is useful to make an overview. Below is an overview of the previously discussed pricing models.

Table 1: Pricing models of elementary services in general

Pricing model Description

Two-part tariff (Dolan and

Simon 1996) A fixed price and an additional price per unit. Two-block tariff (Dolan and

Simon 1996) A price per unit (p) is charged for any units, up to a certain quantity (q2), and then the price per-unit changes to (p2) for all units greater than (q2).

Two-block tariff (with two two-part tariffs combined) (Dolan and Simon 1996)

Each of the two blocks has a fixed and a variable price component.

Multi-dimensional pricing

(Simkovich 1998) A flat monthly fee plus a varying price per unit is charged. Activity based pricing model

(Daly 2002) Consists of a work program list of the tasks to be performed, a list of the hours required to perform each task and a different billing rate for each type of personnel involved with the task. Fixed price (Berends 2004) A fixed price for a certain service.

Commission (Berends 2004) A percentage fee or fixed fee that is paid only if a service is successful.

Time and material (Berends

2004) Actual cost of labor and material is paid according to agreed labor rates and material costs.

2.1.2 Pricing models of various specific elementary services

This section gives an overview of pricing models used for more specific elementary services. These pricing models are also discussed to obtain a broader view on the different types of pricing models that are applicable for elementary services.

Pricing models of various services such as Internet access, music, and telephone According to Essegaier, Gupta and Zhang (2002), telecommunication, fitness club and Internet access services often use one or more of the following pricing models:

• Flat fee pricing: the user pays a fixed amount to gain access.

• Usage based pricing: the user is charged on the basis of actual usage.

• Two-part tariff pricing: this is a combination of the former two models in which the user pays a fixed price to gain access plus a price based on actual usage.

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Choi, Stahl and Whinston (1997) argue that services such as cable TV, telephone and Internet access are often sold by subscription. In addition, subscription based services are often priced at a flat rate, with no control over consumer usage. Looking at pricing models for Internet access, McKnight and Bailey (1995) highlight two different models:

• Flat fee or subscription: user pays a fixed amount to get access.

• Usage sensitive: user pays a portion of the Internet bill for a connection and a portion of each bit sent and received.

Looking further at pricing models for Internet access, Odlyzko (2001) discusses the flat rate pricing model, where the user pays a fixed amount, and the usage-sensitive pricing model, where the user is charged on the basis of usage. Furthermore, Choi, Stahl & Whinston (1997) argue that flat-rate pricing is the most common pricing model for Internet access. They state that flat rate pricing consists of a fee for a certain bandwidth usage that is independent of the actual usage. Wu, Chen and Anandalingam (2002) argue that the flat fee, usage based and two-part tariff are three commonly used pricing models of services such as software application services provided by an online ASP over the Web, online discounted brokerage, SMS and WAP services. Looking at pricing models used for online music access services, Bhattacharjee and Gopal (2003) state that most online music access services mirror almost the same pricing models as traditional brick-and-mortar stores, in which consumers select and then pay a per-unit price for a music item. They further specify the following online pricing models:

• Per-unit pricing: per unit price for a digital music item.

• Subscription model: a flat-rate price for a subscription service. A subscribing consumer has access to all music items, and may download and own the items as desired.

• Online mixed option model: the provider offers a choice of the per-unit and/or subscription pricing model.

MacKie-Mason and Riveros (1997) discuss two pricing models for electronic access to scholarly literature. The first pricing model discussed is the per-article model, in which a user can buy unrestricted access to a specific article for a fixed price. The second model is traditional subscription, where a user or library can buy unlimited access to a set of articles in a journal volume.

The following table gives an overview of the discussed pricing models of various specific services.

Table 2: Pricing models of various specific elementary services

Flat fee pricing (Essegaier et

al. 2002), (Wu et al. 2002) The user pays a fixed amount to gain access. Usage based pricing

(Essegaier et al. 2002), (Wu et al. 2002)

The user is charged on the basis of actual usage. Two-part tariff pricing

(Essegaier et al. 2002), (Wu et al. 2002)

This is a combination of the former two models in which the user pays a fixed price to gain access plus a price based on actual usage.

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Pricing model Description Usage sensitive (McKnight

and Bailey 1995) User pays a portion of the Internet bill for a connection and a portion of each bit sent and received. Flat rate (Odlyzko 2001) The user pays a fixed amount.

Usage-sensitive Odlyzko 2001)

The user is charged on the basis of usage. Per-unit pricing

(Bhattacharjee and Gopal 2003)

Per unit price for a digital music item. Subscription model

A flat-rate price for a subscription service. Online mixed option model

The provider offers a choice of the per-unit and/or subscription pricing model.

Per-article (MacKie-Mason and

Riveros 1997) A user can buy unrestricted access to a specific article for a fixed price. Traditional subscription

(MacKie-Mason and Riveros 1997)

A user or library can buy unlimited access to a set of articles in a journal volume.

Pricing models of professional services

According to Kotler and Bloom (1984), there are several pricing models that are used for professional services:

• Time and expenses: fees are set by multiplying the number of hours/days of professional service provided by an hourly/daily billing rate and then adding fixed expenses incurred by the professionals for materials, travel, etc.

• Fixed sum: fees are set at some fixed amount prior to providing services.

• Percentage: fee is set as a percentage of some value. For example, advertising agencies receive a commission of 10 percent on the media space purchased for their client. Travel agents receive a 20 percent commission on the value of the travel they arrange.

• Retainer: fees are set prior to a covered time period during which the client receives a predetermined level of service without paying any extra fees.

• Hybrid: fees are determined by using a combination of the time and expenses, fixed sum, percentage and/or retainer pricing models of professional services.

Gummesson (1981) argues that there is no commonly accepted definition of professional services. However, the author gives a more general definition which consists of the following criteria. First of all, the service should be provided by qualified personnel, be advisory and focus on problem solving. Second of all, the professional should have an identity and thus be known under a specific name such as consultant or lawyer. Third of all, the service should be assigned from buyer to seller. Finally, the professional should be independent of suppliers of other services. Examples of professional services are public relation consultancy, management consultancy, auditor and lawyer. The following table gives an overview of the discussed pricing models of professional services.

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Table 3: Pricing models of professional services

Time and expenses (Kotler

and Bloom 1984) Fees are set by multiplying the number of hours/days of professional service provided by an hourly/daily billing rate and then adding fixed expenses incurred by the professionals for materials, travel, etc.

Fixed sum (Kotler and Bloom

1984) Fees are set at some fixed amount prior to providing services. Percentage (Kotler and Bloom

1984) Fee is set as a percentage of some value. Retainer (Kotler and Bloom

1984) Fees are set prior to a covered time period during which the client receives a predetermined level of service without paying any extra fees.

Hybrid (Kotler and Bloom

1984) Fees are determined by using a combination of the time and expenses, fixed sum, percentage and/or retainer pricing models of professional services.

Pricing models of water services

Water services can be priced by using marginal cost pricing (Dewees 2002). In this pricing model, the user pays a fee that is based on usage plus the marginal costs that are associated with that usage. Marginal cost is defined as the increase or decrease in costs as a result of one more or one less unit of output1_{. Dewees (2002)} highlights other pricing models of utility services:

• Two-part tariff: consists of a subscription fee for access to the service and an additional price for each unit purchased.

• Time-Of-Use pricing (TOU): price is set according to peak demand at specific times of day.

• Seasonal pricing: different rates are used during different seasons of the year.

The OECD (1987) highlights several pricing models of piped water services (water supply, sewerage and sewage treatment). These models are:

• Flat rate: a flat rate is charged for the use of water services, the fees are not directly related to quantities of water used. Charges can be based on different aspects like the number of residents, number and type of rooms, number of taps, etc.

• Average cost pricing: to generate a unit cost, all water services costs (except access costs) are grouped together and divided among the total number of units expected to be sold.

• Declining block tariffs: consist of a fixed charge and succeeding blocks of units of water are sold at declining prices.

• Increasing or progressive block tariffs: consist of a fixed charge and succeeding blocks of units of water are sold at increasing prices.

• Two-part tariff: consists of a fixed element and a charge based on usage.

• Marginal cost pricing: in this model, the price reflects the incremental costs to the community of satisfying marginal demands. ncremental costs are defined as quantitative and qualitative resource depletion costs, damage I

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price of a liter of water used or disposed of would be equal to the marginal cost of providing that water service.

The following table gives an overview of pricing models that are used for water services.

Table 4: Pricing models of water services

Flat rate (OECD 1987) Flat rate for the use of water services. Average cost pricing (OECD

1987) To generate a unit cost, all water services costs (except access costs) are grouped together and divided among the total number of units expected to be sold.

Declining block tariffs (OECD

1987) Consist of a fixed charge and succeeding blocks of units of water sold at declining prices. Increasing or progressive

block tariffs (OECD 1987) Consist of a fixed charge and succeeding blocks of units of water sold at increasing prices. Two-part tariffs (OECD 1987) Consists of a fixed element and a charge based on usage. Marginal cost pricing (OECD

1987) The price reflects the incremental costs to the community of satisfying marginal demands. Two-part tariff (Dewees

2002) Consists of a subscription fee for access to the service and an additional price for each unit purchased. Time-of-use pricing (Dewees

2002) Price is set according to peak demand at specific times of day. Seasonal pricing (Dewees

2002) Different rates are used during different seasons of the year. Marginal cost pricing (Dewees

2002) The user pays a fee that is based on usage plus the costs that are associated with that usage.

Pricing models of electricity services

Pricing models of both regulated and de-regulated electricity markets are discussed below. Dewees (2001) argues that competitive, de-regulated electricity markets have generally produced pricing models similar to those that are being used in a regulated market.

Borenstein (2001), and Borenstein et al. (2002) highlight two different pricing models that are used in a de-regulated market:

• Real-Time Pricing (RTP): charges are based on different retail electricity prices for different hours of the day and for different days. The retail price under RTP could be based on the wholesale price. Borenstein and Holland (2002) state that RTP is commonly referred to as peak-load pricing in other literature.

• Time-Of-Use pricing (TOU): price varies in a preset way within certain blocks of time. For example, weekdays 0,4$/KWh from 10pm to 6am and 0.7$/KWh from 6am to noon. TOU is often combined with demand charges: a monthly charge based on the customer's maximum usage during the month. It is a way to charge for a customer's peak usage.

Dewees (2001) further mentions that a fixed pricing model is used in a de-regulated competitive electricity market where the price is set at the weighted average expected spot price. The spo p ice is the present delivery price of a given t r

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Pricing models that are used for electricity services in a regulated electricity market are also discussed by Dewees (2001). He mentions three pricing models:

• Peak-load-pricing: see Real-Time Pricing

• Time-Of-Use pricing: charges vary at different times of day according to a fixed schedule. The price differs in each period/block: peak, semi-peak, off-peak.

• Seasonal plan: the price varies between seasons in accordance with the expected seasonal variation in the spot price.

The table below gives an overview of pricing models that are used to price electricity services.

Table 5: Pricing models of electricity services

Real-Time Pricing (Borenstein 2001), (Borenstein et al. 2002)

Charges are based on different retail electricity Prices for different hours of the day and for different days.

Time-Of-Use pricing (Borenstein 2001), (Borenstein et al. 2002), (Dewees 2001)

Price varies in a preset way within certain blocks of time.

Fixed price (Dewees 2001) The price is set at the weighted average expected spot price. Seasonal plan (Dewees 2001) The price varies between seasons in accordance with the

expected seasonal variation in the spot price. Peak-load-pricing (Dewees

2001) see Real-Time Pricing

The previous two sections present an overview of the pricing models of elementary services. The grouping of these pricing models will be described in section 2.2, after the pricing models of information goods are discussed.

2.1.3 Pricing models of information goods

A broadly accepted definition of information goods is “anything that can be digitized” (Shapiro and Varian 1999). Examples are text, images, voice, data, audio, video, electronic journals, software, etc. The reason why information goods are discussed in this literature overview is because these goods are often rela ed to services, which are offered online. A simple example illustrates this relation: a consumer can purchase a journal article online, but access to the article itself is in fact a service. This relation makes it worthwhile to briefly discuss pricing models of information goods.

t

According to Fishburn and Odlyzko (1997), a flat-rate and a usage-based pricing model can be applied to information goods. In the former model, a fixed price was paid to purchase the goods and in the latter model, charges are based on usage. Brooks and Durfee (2000) consider three different pricing models of information goods. The first model discussed is per-good pricing, where the consumer pays a

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number of units purchased increase. Sundararajan (2004) makes mention of different pricing models for several types of information goods. Among these are:

• Nonlinear usage based pricing for software: the price is based on the total processing speed of the servers on which the software runs.

• Fixed-fee pricing models for different types of information goods (such as an online news and music): the user pays a fixed price that is independent of the usage.

• Two-part tariff pricing: a combination of the fixed-fee and usage based pricing model.

Cox (2002) identified three different pricing models to purchase online journal articles. The author speaks of a simultaneous user pricing model in which the price is linked to an assumed level of usage. Then there is mention of the population-based pricing model, where the price is based on full-time equivalents (FTE’s). FTE’s are defined as full time enrollments in education or the number of employees in an organization. This pricing model consists of a fixed payment to gain access for a certain group of FTE’s. Cox also gives his view on usage-based pricing, where the user is only charged on usage.

Table 6 gives an overview of pricing models that are applicable for information goods.

Table 6: Pricing models of information goods

Flat-rate (Fishburn and

Odlyzko 1997) A fixed price is paid to purchase the goods. Usage-based (Fishburn and

Odlyzko 1997) Charges are based on usage. Per-good pricing (Brooks and

Durfee 2000) The consumer pays a fixed price for each good. Two-part tariff (Brooks and

Durfee 2000) The consumer pays an admission fee and a price for each good. Nonlinear pricing (Brooks and

Durfee 2000) The consumer pays a different price for each good. Nonlinear usage based pricing

for software (Sundararajan 2004)

The price is based on the total processing speed of the servers on which the software runs.

Fixed-fee (Sundararajan

2004) User pays a fixed price that is independent of the usage. Two-part tariff (Sundararajan

2004) A combination of the fixed-fee and usage based pricing model. Simultaneous user pricing

(Cox 2002) The price is linked to an assumed level of usage. Population-based pricing (Cox

2002) Consists of a fixed payment to gain access for a certain group of FTE’s. Usage-based pricing (Cox

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2.2 Grouping of the pricing models of elementary services

A pricing model is defined as “a representation of the way a company plans to set its prices” (Daly 2002). The representations of the pricing models that are discussed in the previous sections are textual. From the overview of pricing models of elementary services, it can be concluded that there are different types of pricing models which are often referred to with different names, although their representations are similar. This section describes a grouping of those pricing models. This grouping is based on the representations of the four most broadly used types of pricing models of elementary services. The pricing models of information goods will also be included in the grouping to see if these models are applicable for elementary services. The textual representation of the four most broadly used types of pricing models of elementary services are described in the table below.

From this point for h in this research, ‘the fou most broadly used types of pricing models o elementary services’ are referred to as ‘the four ypes o pricing models o elementary services’.

t r

f t f f

Table 7: Textual representation of the four types of pricing models of elementary services

Pricing model Formula

Flat-rate The user pays a fixed amount which is independent of usage. Usage-based The user is charged on basis of usage.

Two-part tariff The user pays a fixed amount plus an additional usage based charge. N-block tariff (with

n = 2) A price per unit (p) is charged for any units, up to a certain quantity (q2), and then the price per-unit changes to (p2) for all units greater than (q2).

Remark: the n-block tariff with n > 2 is defined similarly.

The grouping of the pricing models of elementary services is displayed in the table below.

Table 8: Grouping of the pricing models of elementary services

Flat-rate Usage-based Two-part tariff N-block tariff

(with n ≥ 2) Fixed price (Berends

2004), (Dewees 2001) Usage based (Essegaier et al. 2002), (Wu et al. 2002), (Odlyzko 2001)

Two-part tariff pricing (Essegaier et al. 2002), (Wu et al. 2002), (Dewees 2002), (OECD 1987), (Dolan and Simon 1996)

Two-block tariff (with two two-part tariffs combined) (Dolan and Simon 1996) Online mixed option

model (Bhattacharjee and Gopal 2003)

Online mixed option model (Bhattacharjee and Gopal 2003)

1984) Declining block tariffs (OECD 1987) Per-article (MacKie-Mason

and Riveros 1997) Usage sensitive (McKnight and Bailey 1995) Time and expenses (Kotler and Bloom 1984) Seasonal pricing model (Dewees 2001, 2002) Fixed sum (Kotler and

Bloom 1984) Per-unit pricing (Bhattacharjee and Gopal 2003)

Time and material (Berends

2004) Real-Time Pricing (Borenstein 2001), Borenstein et al. 2002),

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Flat-rate Usage-based Two-part tariff N-block tariff (with n ≥ 2) Commission (Berends

2004) Information goods:usage based pricing for Nonlinear software (Sundararajan 2004)

Information goods: two-part tariff (Brooks and Durfee 2000),

(Sundararajan 2004)

Two-block tariff (Dolan and Simon 1996)

Subscription (Choi et al. 1997), (McKnight and Bailey 1995),

(Bhattacharjee and Gopal 2003), (MacKie-Mason and Riveros 1997)

Information goods: Simultaneous user pricing (Cox 2002)

_ Time-Of-Use pricing

(Dewees 2002), (Borenstein 2001, Borenstein et al. 2002), (Dewees 2001) Flat fee pricing (Essegaier

et al. 2002), Wu et al. 2002), (McKnight and Bailey 1995)

Information goods: per-good pricing (Brooks and Durfee 2000)

_ Information goods: Nonlinear pricing (Brooks and Durfee 2000) Retainer (Kotler and

Bloom 1984) _ _ _

Percentage (Kotler and

Bloom 1984) _ _ _

1984) _ _ _

Information goods: Flat-rate (Fishburn and Odlyzko 1997) _ _ _ Information goods: Fixed-fee (Sundararajan 2004) _ _ _ Information goods: Population-based pricing (Cox 2002) _ _ _

The grouping highlight that the pricing models of information goods can be grouped under the four types of pricing models of elementary services. This means that the pricing models of information goods are also applicable for elementary services (offered online), which further acknowledges their close relation. There are some pricing models which cannot be grouped under one of the four types of pricing models. These are: Average cost pricing (OECD 1987), Marginal cost pricing (OECD 1987), (Dewees 2002), and Activity based pricing (Daly 2002). These are very specific pricing models of elementary services since they do not occur often in the studied literature.

2.3 Pricing of service bundles

As stated in section 1.2, a service bundle is “a ‘package’ of two or more elementary (single) services” (Grönroos 2000), which can possibly be supplied by different suppliers. The studied literature mostly discusses pricing strategies when looking at the ways to price service bundles. However, the focus of this research is on pricing models of services and not on pricing strategies of services. A pricing model is a

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A pricing model is closely related to a pricing strategy, because the price of a service must be set between the limits that are determined by the pricing strategy, and the price itself is derived from a pricing model. Due to this relation, this section will discuss pricing strategies of bundling to obtain more insight in the constructions of pricing models used for service bundles. This section will also discuss the few variants of pricing models that are mentioned in the literature. Additionally, examples of the way service bundles are priced in practice are also used to obtain more insight in the constructions of pricing models used for service bundles. This section ends with a description of two pricing models that are applicable for service bundles. These are derived from the studied literature and examples from practice.

2.3.1 The strategy of bundling

The strategy of bundling products into a single ’package’ is broadly known in the literature, and widely used in many industries. Yet, there is no consensus on how to define the term bundling (Stremersch and Tellis 2002). In spite of the lack of a common definition, most definitions share a common core, as defined by Stremersch and Tellis (2002): “bundling is the sale of two or more separate products in one package” (in their discussion on pricing and bundling strategies, the researchers make a distinction between product bundling and price bundling, which is beyond the scope of the current discussion). Another well-accepted definition is given by Guiltinan (1987), who also refers to the price of a bundle in his definition: “bundling is the practice of marketing two or more goods or services in a single package for a special price”. In addition to this definition, Dolan and Simon (1996) identified an exception for bundling, since they state that a discount is not a necessary condition for bundling. They name an example in which the complete set of collector’s items can be much more expensive than the sum of the individual components of the set. However, in most studied literature, the strategy of bundling is applied in accordance with the definition given by Guiltinan (1987). Therefore, this research also applies the strategy of bundling in accordance with that definition.

Adams and Yellen (1967) discuss two forms of bundling, namely pure bundling and mixed bundling. Pure bundling is combining two or more goods or services, not sold separately, into a single package (also see Bakos and Brynjolfsson 1999). Mixed bundling is combining two or more goods or services, also sold separately, into a single package. Furthermore, there are two variants of mixed bundling (Guiltinan 1987):

• Mixed-leader bundling: the price of one of the two services is discounted when the other service (the leader service) is purchased at the regular price (also see Kasper et al. 1999, Kurtz and Clow 1998).

• Mixed-joint bundling: the bundle price is lower than the individual prices of the services, which are part of the bundle (also see Kasper et al. 1999, Kurtz and Clow 1998).

Dolan and Simon (1996) describe the multi-person pricing strategy, in which price discounts are awarded to an additional person who buys the same service.

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larger pool of N services for a fixed discounted price. This pricing strategy corresponds with individual selling when M=1, and pure bundling when M=N. The table below gives an overview of the discussed pricing strategies for service bundles. Furthermore, Hanson and Martin (1990) discuss a methodology for developing a bundling strategy for a product line consisting of a large number of items. The methodology consists of a mixed integer linear programming algorithm for determining the profit-maximizing set of bundles and bundle prices. Below is an overview of the different types of bundling strategies.

Table 9: Overview of bundling strategies

Bundling strategy Description

Pure bundling (Adams and

Yellen 1967) Combining two or more goods or services, not sold separately, into a single package Mixed bundling (Adams and

Yellen 1967) Combining two or more goods or services, also sold separately, into a single package Mixed-leader bundling

(Guiltinan 1987, Kasper et al. 1999, Kurtz and Clow 1998)

The price of one of the two services is discounted when the other service (the leader service) is purchased at the regular price

Mixed-joint bundling

(Guiltinan 1987, Kasper et al. 1999, Kurtz and Clow 1998)

The bundle price is lower than the individual prices of the services, which are part of the bundle

Multi-person pricing (Dolan

and Simon 1996) Price discounts are awarded to an additional person who buys the same service Customized bundle pricing

(Hitt and Chen 2004) The consumer has the right to choose up to a quantity of M products from a larger pool of N products for a fixed discounted price. This pricing strategy corresponds with individual selling when M=1 and pure bundling when M=N Methodology for developing a

bundling strategy (Hanson and Martin 1990)

Methodology consists of a mixed integer linear programming algorithm for determining the profit-maximizing set of bundles and bundle prices

2.3.2 Pricing models of service bundles

The few variants of pricing models that are mentioned in the literature are described in this section. Dolan and Simon (1996) discuss the all-units quantity discount pricing model to price a bundle of services. The all-units quantity discount pricing model is described as follows: when a certain quantity level is exceeded, a discounted price is applied to all units. The authors describe an example of this pricing model in which a fitness centre offers exercise services and charges €6 for one session, €50 for ten sessions (€5 per session) and €90 for 20 sessions (€4.5 per session). Theaters and telephone companies often have a similar pricing model for subscribers. Altinkemer (2001) describes an example in which a two-part tariff pricing model is applied for a service bundle. This pricing model consists of a fixed part, plus an additional price per unit. In the example of Altinkemer (2001), a company offering electronic payment bundles, charges $8.95 per month for a bundle of up to 25 electronic payments, plus 50 cents per transaction above that. The price of the bundle is lower than the total price of the electronic payments when these are purchased separately. Table 10 gives an overview of the discussed pricing models of service bundles.

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Table 10: Pricing models of service bundles

All-units quantity discount

(Dolan and Simon 1996) When a certain quantity level is exceeded, a discounted price is applied to all units. Two-part tariff (Altinkemer

2001) The price of the bundle consists of a fixed part, plus an additional price per unit. The price of the bundle is lower than the total price of the services that are part of the bundle when these are purchased separately.

2.3.3 Examples of pricing models of service bundles from practice

In the literature not many variants of pricing models of service bundles are discussed. Therefore, examples of the way service bundles are priced in practice are used to get more insight in the constructions of pricing models used for service bundles. These examples may give more insight on the way the price of a service bundle is calculated. See the table below for some examples of service bundles from practice. The table also displays the corresponding pricing strategies. (All the links in the table were last visited in March 2005).

Table 11: Examples of service bundles from practice Type of

services Description of service bundle Pricing strategy

TV, telephone

and Internet A customer can choose to bundle TV, telephone and Internet services. The bundle is sold as a subscription for a fixed price per month. The price is discounted with a fixed amount when the services are bundled. The discount is higher when all three services are part of the bundle.

http://www.kpn.com/kpn/show/id=431248/sc=a8c5c9

Mixed bundling

Dialup and

hosting A customer can purchase a bundle of dialup and hosting services for a fixed price, and receive 10% discount on both services. http://www.spire.com/business/business.asp

Mixed bundling DSL Internet

and TV A customer can purchase a subscription consisting of Internet and TV services. The bundle is sold for a fixed price per month, and the customer saves up to $10 every month for bundling the services. http://ebusiness.mts.mb.ca/mtsapplications/css/home.nsf/prod/MTS %20DSL%20Internet%20TV%20Bundle?opendocument&~v1=_is Mixed bundling Internet, Telephone and Cable TV

A customer can purchase a subscription consisting of a bundle of Internet, telephone and Cable TV services. The bundle is sold for a fixed price per month. The customer can choose any two services and save up to $20 a month, or choose all three services and save $25 a month. http://www.comcast-ne.com/bundle_packages.html Mixed bundling Phone, digital TV and broadband Internet

All subscription services are sold as a bundle for a fixed discounted price.

http://www.telewest.co.uk/html/bundles/valuebundle.htm

Mixed bundling TV and radio Both TV and radio subscription services are sold in a bundle for a

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Type of

services Description of service bundle Pricing strategy

Newspaper

access Customers have four options to pay for a subscription to gain access to the newspaper archives: e.g. Sunday only access for $13.60, or $0.75 per article.

www.nytimes.com

Customized bundle pricing Congress and

exposition Every second person of the same organization gets in for free at a congress and exposition. http://www.e-dynamics.nl/startpagina/index.cfm?fuseaction=ckc

Multi-person pricing Courses When two persons enroll for a course, the second person gets 5%

discount. When three persons enroll, the second person gets 5% and the third gets 10%. When four people enroll, the second person gets 5%, the third gets 10% and the fourth gets 15%.

http://www-306.ibm.com/services/learning/ites.wss/be/nl?pageType=page&cont entID=a0005008

Multi-person pricing

Electricity A customer can bundle an electricity account with any or all of the other services - natural gas, internet or phone services for a fixed price per month. By bundling the services, the customer can save up to $230 on a 2-year contract.

http://www.actewagl.com.au/default.aspx?loc=/campaigns/bundles/ default.htm

Mixed bundling

The above examples do not give detailed information about the constructs of the pricing models used for the service bundles. Thus, the exact way in which the price of the service bundles from practice is calculated is still unknown. If the focus is not on the construction of the pricing models but more on the way the bundles are sold, then it can be concluded that the bundles are sold at a fixed price, often by a subscription. In the literature, it is also stated that service bundles are often sold at a fixed price. For example, Choi et al. (1997) argue that service bundles are often sold by subscription. Additionally they state that subscription based services are mostly priced at a fixed price. Shapiro and Varian (1999) also state that bundles of two or more products are sold at a fixed price. Furthermore, the examples from practice highlight that providers sell service bundles by giving a discount in either a fixed amount or by a percentage. Thus, it can be concluded that the service bundles from practice are sold at a fixed discounted price, often by subscription.

2.3.4 Two ways to calculate the price of service bundles

The all-units quantity discount and the two-part tariff pricing models of service bundles (see section 2.3.2) are very specific pricing models of service bundles, given that they are not discussed elsewhere in the studied literature. The previous three sections, the studied literature (sections 2.3.1 and 2.3.2), and examples from practice (section 2.3.3) do not give enough detailed information on the way the price of a service bundle is calculated. However, the recurring element in the sections is that a discount is applied to the price of a service bundle. The discount is either a fixed amount or a percentage.

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If this discount is used as a starting point to calculate the price of a service bundle, it can be concluded that the price of a service bundle can be calculated in two ways.

1. First the individual price of each service element that is part of a service bundle has to be formulated. Then the price of the service bundle is calculated by applying a specific price discount, which is calculated from the combined prices of the service elements that are part of the bundle. This is derived from Tung et al. (1997).

2. First a discount is applied to the price of one or more service elements that are part of the service bundle. Then the price of the bundle is calculated by adding up these prices. This is derived from the mixed-leader pricing strategy.

These two ways to calculate the price of service bundles are the pricing models of service bundles, which will be used throughout this research. The representations of these pricing models are different than those of the four types of pricing models of elementary services. The pricing models of service bundles consist of a discount, and of the outcomes of the pricing models of the services that are part of the bundle. These constructs are not present in the pricing models of elementary services.

2.4 Mathematical representation of the pricing models

Up to this point, only textual representations of pricing models of services are considered. However, the representation can also be mathematical, in the form of a formula. A mathematical formula is needed to actually derive the price as a mathematical unit. The following section describes the way a formula is constructed in mathematics. The section after that gives an overview of the formulas of the four types of pricing models of elementary services, and the two types that are applicable for service bundles.

2.4.1 Analysis of a mathematical formula

In mathematics2_{, a formula is a fact, rule, or principle that is represented in terms} of mathematical symbols. Examples of symbols are operands and operators. A formula consists of one or more expressions and every expression consists of at least one operand and can have one or more operators. An operand is a mathematical object upon which an operator acts. An operator is a symbol that represents a specific action. For example, a plus sign (+) is an operator that represents addition. The basic mathematic operators are addition (+), subtraction (-), multiplication (x(-), division (/). Operators are ranked by precedence levels, which indicate that operators with a higher precedence level bind more strongly than those of a lower level. A formula can consist of a binary operation, which is an operation that applies to two expressions. The basic binary operations are:

• Addition: The combining of two or more quantities using the plus operator. The individual numbers being combined are called addends, and the total is called the sum. The first of several addends, or ‘the one to which the others are added’, is sometimes called the augend. The opposite of addition is

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summed are called addends. The summation operation can also be indicated using a capital sigma (Σ) with upper and lower limits written above and below, and the index indicated below. Sigma is defined as:

.

...

₁ 2 1 m n n m n m i m i

x

=

+

₊

+

₊

+

₋

+

=

∑

Here, i represents the index of summation: m is the lower limit of summation, and n is the upper limit of summation.

• Subtraction: Is the operation of taking the difference of two numbers p and q. Here, p is called the minuend, q is called the subtrahend, and the symbol between the p and q is called the minus sign. The expression ‘p – q ’ is read ‘p minus q ’. Subtraction is the inverse of addition.

• Multiplication: Is the process of calculating the result when a number p is taken q times. The result of a multiplication is called the product of p and q, and each of the numbers p and q is called a factor of the product p x q. The symbol x is known as the multiplication sign.

• Division: Taking the ratio p/q of two numbers p and q. Here, p is called the dividend, q is called the divisor, and p/q is called a quotient. The symbol "/" is called a solidus (sometimes, the "diagonal"). Division is the inverse operation of multiplication.

2.4.2 Formulas of the pricing models of elementary services and service bundles

Below is an overview of the formulas of the four types of pricing models of elementary services. These formulas are derived from Dolan (1987).

List of terms used in the formulas:

• C is the total charge to the customer.

• q and q_2 are usage amounts.

• Fix is a fixed price.

• p and p_2 are prices per quantity.

Table 12: Formulas of the four types of pricing models of elementary services

Flat-rate C = Fix Usage-based C = p x q Two-part tariff C = Fix + p x q N-block tariff (with

n = 2) C = • p x q (for: 0 ≤ q ≤ q_2)

• p x q_2 + p_2(q – q_2) (for: q > q_2) Remark: the n-block tariff with n > 2 is defined similarly.

The two ways to calculate the price of service bundles are discussed in section 2.3.4. These two ways are the pricing models of service bundles. The formulas of these pricing models are presented in Table 13. In the table, ‘type 1’ is the formula of the first way to calculate the price of a service bundle, and ‘type 2’ of the second way.

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List of terms used in these formulas:

• PM_elem is the pricing model of an elementary service that is part of the bundle.

• discount is an amount that can be calculated as a fixed amount or as a percentage of the (total) price of elementary services that are part of the bundle.

• discount_elem is the discount of an elementary service that is part of the bundle.

Table 13: Formulas of the two types of pricing models of service bundles

Type 1

discount

elem

PM

C

n m i i

−

=

∑

=

_

Type 2

))

_

(

)

_

((

_i n m i i

discount

elem

PM

C

=

∑

−

=

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Chapter III Case studies

The reason to include case studies in this research is to see if the representations of the pricing models of services (elementary and bundled), which are described in the literature overview chapter, are representative for services in practice (i.e. to validate the theory). To realize this, the representations of these pricing models of services will be compared with pricing models of services from practice. Given that the representation of a pricing model can be textual and mathematical (formula), these will both be included in the comparisons. This chapter will present an overview of the comparisons. In the first section, the pricing models of services from practice that are identified in the SINTEF case study (Morch et al. 2004) will be used in the comparisons. In the second section, the pricing models identified in the SENA case study (Gordijn et al. 2004) will be used. In the third section, the results of the first two sections will be combined, which will lead to a revision of the formulas of the four types of pricing models of elementary services.

3.1 The SINTEF case study

The SINTEF case study describes several core services that are offered by TrønderEnergi AS, which is an electrical utility company with several subsidiaries. Their core product is electricity. A core service describes the way the supplier’s business adds value to a value chain (Akkermans et al. 2004). The core services that are described in the SINTEF case study are: Electricity supply, Heat pump, Energy control system, Broadband access, ASP-service, Hot water, Remote control, Safety check and Internal control. The pricing models of the ‘remote control’ core service are not described in the case study, because the company that made it possible to offer this service is no longer in the market.

Pricing models of service bundles are not included in this case study. This is because the work concerning the evaluation of different bundles offered by TrønderEnergi AS was on a theoretical level, and at the time of the case study it did not offer bundles to customers. By bundling the core product of TrønderEnergi AS with other services, the company can be more differentiated in the power market and give a steadier portfolio to the customer. One of the reasons for bundling was that the total costs for both TrønderEnergi AS and the customers would be reduced, but no calculations concerning this have been performed. Thus, for this case study only the four types of pricing models of elementary services will be included in the comparisons.

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3.1.1 Comparison of the textual representations

In this section, the textual representation of the four types of pricing models of elementary services are compared with the core services that are described in the SINTEF case study. The textual representations of these types of pricing models of services are described in the literature overview in Table 7. See the table on the next page for the comparison.

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Table 14: Comparison of the textual representation of the pricing models described in the SINTEF case study with the four types of pricing models of elementary services

Core

service Pricing model of the core service Textual representation of the pricing model of the core service Corresponding pricing model from the literature overview

Electricity

supply Variable Contract with variable price based on usage. Usage based: The user is charged on basis of usage. Electricity

supply Fixed Contract with fixed price for a defined period (Different possibilities – 1, 2 or 3 years). Flat-rate: The user pays a fixed amount which is independent of usage. Electricity

supply Spot-hourly Contract with spot price on an hourly basis.

N-block tariff (with n = 2): A price per unit (p) is charged for

any units, up to a certain quantity (q2), and then the price per-unit changes to (p2) for all units greater than (q2).

Electricity

supply Spot-monthly Contract with spot price on a monthly basis.

N-block tariff (with n = 2): A price per unit (p) is charged for

any units, up to a certain quantity (q2), and then the price per-unit changes to (p2) for all units greater than (q2).

Electricity

transmission Traditional household Fixed price plus energy price per kWh. Two-part tariff: The user pays a fixed amount plus an additional usage based charge. Electricity

transmission

Seasonal household Fixed price plus two different energy prices per kWh

for summer and winter. Two-part tariff: The user pays a fixed amount plus an additional usage based charge. Electricity

transmission Power industrial Contains a fixed price, an energy price per kWh and a power price per kW for the peak load consumption. Two-part tariff: The user pays a fixed amount plus an additional usage based charge.

Heat pump Pump type (ASY9L or

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Core

service Pricing model of the core service Textual representation of the pricing model of the core service Corresponding pricing model from the literature overview

Energy control system

Installation type (new or

existing) Fixed price for the electric heater plus installation labor costs. Two-part tariff: The user pays a fixed amount plus an additional usage based charge. Broadband

access Subscription (Basic, Regular, Luxurious, Industrial-luxury, Fiber-Basic, Fiber-Regular, Fiber-Luxurious)

Fixed charge is based on the subscription type. Flat-rate: The user pays a fixed amount which is

independent of usage.

ASP Basic subscription Fixed price for the standard product. Flat-rate: The user pays a fixed amount which is

independent of usage. ASP Remote connection

subscription Fixed price for the standard product with safe logging to Internet. Flat-rate: The user pays a fixed amount which is independent of usage. ASP Basic subscription &

helpdesk Fixed price for the standard product plus consulting service that is charged per hour. Two-part tariff: The user pays a fixed amount plus an additional usage based charge. ASP Remote connection

subscription & helpdesk

Fixed price for the standard product with safe logging to Internet plus consulting service that is charged per hour.

Two-part tariff: The user pays a fixed amount plus an

additional usage based charge. Hot water Standard Fixed yearly price and an energy price per unit hot

water consumed. Two-part tariff: The user pays a fixed amount plus an additional usage based charge. Safety

check Basic Fixed charge. Flat-rate: The user pays a fixed amount which is independent of usage. Internal

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3.1.2 Comparison of the mathematical representations

In this section, the mathematical representation (formula) of the four types of pricing models of elementary services are compared with the core services that are described in the SINTEF case study. The formulas of the four types of pricing models of elementary services are described in the literature overview in Table 12. Below is a list of terms used in these formulas:

• q and q_2 are usage amounts.

• Fix is a fixed price.

• p and p_2 are prices per quantity.

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Table 15: Comparison of the mathematical representation of the pricing models described in the SINTEF case study with the four types of pricing model of services

Core service Pricing model of the

core service Formula of the pricing model of the core service Corresponding formula of the pricing model from the literature overview

Electricity supply Variable electricity price x electricity consumption Usage based: p × q Electricity supply Fixed fixed price Flat-rate: Fix Electricity supply Spot-hourly (electricity spot price in hour_1 x electricity consumption in

hour_1) + … + (electricity spot price in hour_n x electricity consumption in hour_n)

Remark: n = 24

N-block tariff (with n = 2):

• p x q (for: 0 ≤ q ≤ q_2) C =

• p x q_2 + p_2(q – q_2) (for: q > q_2)

Electricity supply Spot-monthly (average electricity spot price in month_1 x total electricity consumption in month_1) + … + (average electricity spot price in month_n) x (total electricity consumption in month_n)

Remark: n = 12

N-block tariff (with n = 2):

• p x q (for: 0 ≤ q ≤ q_2) C =

• p x q_2 + p_2(q – q_2) (for: q > q_2)

Electricity

transmission Traditional household fixed price + (energy price x energy consumption) Two-part tariff: Fix + p × q Electricity

transmission Seasonal household fixed price + ((energy

An ontological approach for the use of pricing models to sell services Master thesis in Information Sciences