IT MARKETING: PRICING

by Kenneth Rau, Senior Consultant, Cutter Consortium

I have suggested that IT organizations consider adding a new function -- IT marketing -- to complete the complement of functions in IT that parallel those of the business (see " IT Marketing: The Forgotten Function -- Parts I and II," Vol. 8, Nos. 17 & 18). I have proposed that such a function include public relations (PR), enhancing IT's image, sales, pricing, customer care, and promotions, and have also discussed what duties an IT public relations, image, and sales department might undertake. In this Advisor, I discuss what IT pricing would involve.

The IT analogy to the business marketing process of pricing is generally referred to as chargeback, in which the costs of providing services to IT's customers are allocated to the consumers of those services. Most large IT organizations are involved with charging for their services, but few approach it as much more than an accounting exercise. As such, it is the cost of services that becomes the focus of the allocation -- removing costs from the IT budget and achieving a near-zero or zero cost basis for the central or shared-services IT organization. In most cost allocation methods with which I am familiar, IT system development and support activities are generally charged back based on hours incurred on requested services; infrastructure costs on IT resources consumed (where multiple business functions use the same IT resource, such as a server or storage facility); or for actual resources ordered through IT, such as cell phones or PDAs. Other than perhaps in the year of introduction, user behavior is seldom altered as a result of these charges, particularly when the chargeback algorithms are laced with technobabble that is indecipherable to most users.

If we approach the objective stated above with our IT marketing hat on, a more business-beneficial result can be obtained. Pricing can be usefully disassociated from cost and used to better achieve desired customer outcomes or behaviors, such as adoption of new services, reduction in the use or abandonment of services targeted for elimination, and/or more frugal use of expensive services. Additionally, pricing of services or resources, if disassociated from the specific resources consumed in their generation (processing cycles, disk space consumption, etc.), can be based on units of consumption more familiar and comfortable to the user, such as invoices produced, paychecks generated, orders entered, or reports requested. Unit pricing has been found to have a more profound impact on changes in customer behavior than does a strict cost-of-service approach to chargeback.

Other, more imaginative approaches to charging for IT services and resources often result when a market-oriented pricing approach is invoked. Examples include fixed pricing for system development efforts, at least on a phase-by-phase basis. I have seen the phase-by-phase approach -- sometimes called a cascading estimate -- lead to improved control of projects. This occurs because each phase-end review session tends to be treated formally and seriously, as variations in funds expended and funds to be committed are more real to the oversight committee. Fixed-price approaches to infrastructure acquisition and installation can also become attractive. Finally, as pricing decisions in business also involve alternative financing arrangements, an imaginative approach to chargeback in IT based on marketing-related pricing might include offering users a multiyear lease on large infrastructure components, such as server or disk farms purchased by IT. One IT organization that has adopted this approach refers to it as "condominium pricing."

The risk to IT of pricing services unrelated to their cost is, of course, that full recovery of costs is not guaranteed. If the price of services is incorrectly calculated or estimated, IT may incur an unfunded budget variance. This is not possible in cost allocation methods where the charges for services vary based on actual costs experienced. In essence, pricing to achieve desired outcomes transfers the risks of unfunded variances from the user to IT, probably where it should reside in the first place. The benefits of disassociating cost and pricing for IT services include providing IT customers with a more easily understood charging mechanism and providing IT with a mechanism to encourage desirable behavior by its customers.

-- Kenneth Rau, Senior Consultant, Cutter Consortium