Pricing Methods

Financial institutions should have several choices when it comes to pricing an outsourcing venture. Management should consider all available pricing options and choose the most appropriate for the specific contract. Examples of different pricing methods include:

  • Cost plus-The service provider receives payment for its actual costs, plus a predetermined profit margin or markup (usually percentage of actual costs). For example, the service provider builds a website at a cost of $5,000 plus a 10% markup; the institution pays $5,500.
  • Fixed price-The service provider price is the same for each billing cycle for the entire contract period. The advantage of this approach is that institutions know exactly what the provider will bill each month. Problems may arise if the institution does not adequately define the scope or the process. Often, with the fixed price method, the service provider labels services beyond the defined scope as additional or premium services. For example, if a service provider bills an institution $500 per month for maintaining a website, and the institution decides it wants to add another link, the service provider may charge more for that service if it is not clearly defined in the original contract.
  • Unit pricing-The service provider sets a rate for a particular level of service, and the institution pays based on usage. For example, if an institution pays $.10 per hit on a website, and the site has 5,000 hits for the month, the institution pays $500 for the month.
  • Variable pricing-The service provider establishes the price of the service based on a variable such as system availability. For example, the provider bills the institution $500, $600, or $800 per month for service levels of 99.00, 99.50, or 99.75 percent system availability, respectively. If a website was available 99.80 percent of the time in a billing period, the institution would pay $800.
  • Incentive-based pricing-Incentives encourage the service provider to perform at peak level by offering a bonus if the provider performs well. This plan can also require the provider to pay a penalty for not performing at an acceptable level. For example, the institution wants a service provider to build a website. The service provider agrees to do so within 90 days for $5,000. The institution offers the provider $6,500 if the website is ready within 45 days, but states that it will only pay $3,500 if the provider fails to meet its 90 day deadline.
  • Future price changes-Service providers typically include a provision that will increase costs in the future either by a specified percentage or per unit. Some institutions may also identify circumstances under which price reductions might be warranted (i.e., reduction in equipment costs).

 

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