Pricing Under Quality of Service Uncertainty: Market Segmentation via Statistical QoS Guarantees
European Journal of Operational Research, 2008

This article by Professor Hemant Bhargava and co-author Daewon Sun at the University of Notre Dame examines how performance-contingent pricing schemes with long-term statistical performance guarantees can be applied to many IT services. The authors study two forms of performance-contingent pricing, with rebate proportional to failure rate and fixed rebate for below-threshold performance. The study shows that threshold-performance contingency pricing can increase both profits and fairness (customers who receive higher benefits pay higher effective price) relative to standard pricing. But an even better solution is to offer a menu of performance guarantees: this can increase the firm’s profit and segment the market. Only service providers whose performance level is sufficiently better than the industry standard can benefit from this pricing mechanism.