Use the right pricing model for third-party services

Which pricing mechanism should your company choose when buying third-party services? What is the optimal contract length? And what is the best way to manage switching costs? These questions are even more important today than in the past because the services industry is switching to new pricing mechanisms for digital services. Understandably, these changes create consternation and confusion for buyers of services.  What comprises service prices? In this post, I’ll explain how pricing works and, hopefully, clear up confusion and help your company make optimal decision.

What comprises a pricing mechanism?

The way your company buys third-party services is a function of two factors:

  1. The service provider’s business model (the type and number of resources it provides)
  2. The behaviors your company wants to influence in the company providing the services.

I’ll explain how the business models affect four types of pricing mechanisms and how buyers try to influence a provider’s behavior through those pricing mechanisms.

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