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Transaction Based Pricing (TBP) has arrived!!

Pricing models like Fixed Price (FP) where application pricing is charged for delivering complete working application to customer, Time and Material (T&M) where IT resources (primarily no. of people) are charged based on the time spent on the project. Both these models have been around for some time and are thoroughly tested with their pros and cons.

Over a period, clients have been demanding more stringent pricing models where investments in IT and success of projects are directly tied to the business outcomes through models like risk-reward pricing. While in some selective cases risk reward based pricing has been happening, agreeing and negotiating risk reward pricing contract is not easy for both clients and service providers. Hence this has not been widely adopted into the main stream.

Transaction based pricing is a model where a consumer is charged based on the units of functionality consumed e.g. $1 per person charged for a train ticket from xyz portal. The unit here is a train ticket per person.  The transaction unit mentioned above could vary from application to application and context to context. With marketing intelligence, the pricing model can get more intuitive where offers can be devised like within a year if you buy 100 tickets, the company will refund the charges for 10 tickets and so on.

The case for transaction based pricing is getting stronger due to multiple reasons like running full house IT operations is not feasible for businesses of all size, ROIs on IT projects are too farfetched, ongoing credit crisis and tightened norms for availability of credit to invest in IT, catering to elasticity of demand like need to serve more customers during Christmas sales or peaking of filing income tax returns during particular months of a year. All this surmises to an upfront CAPEX (Capital expenditure) even before businesses can start reaping fruits.

In late 1970’s Mainframes were affordable to only large organizations as against Personal computer today. Similarly if IT application ownership has to be commoditized from enterprises and large businesses to every individual, a model like transaction based pricing has a crucial role to perform.

While there are several instances where business and retailers as a consumer have adopted transaction based pricing e.g. Mobile/Internet connection, Electricity/Water consumption, Bus/Train Travel passes /reservations and so on. Imagining IT applications/services to be consumed like any other commodities is fairly nascent to the industry.

Transaction based pricing is recently seeded through Microsoft Cloud offerings and other vendors like Google, Amazon, Rackspace, etc.  Although there are fundamental differences in FP, T&M and Transaction based pricing. Going forward, i am sure Transaction Based Pricing will take a major pie of T&M and FP models described above and more likely emerge as a leading pricing model.

Comments

Sudhanshu,
Agree that TBP was more or less prominent in ITES and is getting popular in core IT now, however clients who prefer to control factors like Estimation, schedule and cost might not get liking for the TBP.

Sudhanshu,
Agreed that Transaction Based pricing will take preference, How succesful will this model be in standard Application development projects. If I am not wrong, such a kind of model might be implementable in maintenance projects and in BPO where results are immediately visible rather than in Development projects.

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