Pricing Models in IT Industry
Published on: Mar 4, 2016
Transcripts - Pricing Models in IT Industry
Title : Business Models in IT Industry.
Subject : PDEL-I
Level / Semester : I / Feb 2010
Programme : MBA-FULL TIME
Subject Tutor : Mrs. Ashuti
Name of Student : Vivekanandan M
Student’s Registration Number : GPBL-B/F10/15
Date of Submission : Apr 12, 2010
Word Count : 1600 words
Word Limit : 2000 words
Students Name Vivekanandan M
Registration Number GPBL-B/F10/15
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TABLE OF CONTENTS PAGE No.
Introduction to Business model 1
Introduction to IT/ITES Industry in India 1
Business Models in IT Industry 2
Need for innovative business models 6
Introduction to Business Model
Business model for an organization describes how organizations create and deliver value to
their customer. Most common and known business model is shopkeeper model – setting up of
a shop close to the place where potential customers live. Some examples of business models
are - Auction business model, bricks and clicks business model, franchise, loyalty business
model, subscription business model etc.
For a start-up company to offer their innovation to their customers, it is important for them to
identify the right business model, which will create and deliver value to their customer.
Following are key components in a business model,
a. Value proposition – the value that the customer gets, in addition to the solution
provided for his business problem
b. Process – how the resources work to deliver value to the customer
c. Revenue generation – how the revenue is generated by the company
This report explains the various business model followed by the IT industry and the need for
looking at innovative business models for the growth of the IT industry.
Introduction to IT/ITES Industry in India
India being a low cost country, having huge educated talent pool and politically a peaceful
country has become the preferred destination for software services. Information Technology
(IT) industry offer both software and hardware development to the customers. It includes
software/hardware design, development, testing and maintenance. IT services also includes
development of IT infrastructure and management of those infrastructure. ITES refers to
Information Technology Enabled Services, which includes delivery of services using IT.
Business Process Outsourcing (BPO) falls under ITES segment. Other ITES service includes
– finance, HR, billing, call center, customer support, etc.
Companies in IT industry can broadly be categorised into 2 segments,
a. Product development – Companies which develop software/hardware product and sell
it to the customers.
b. Services – Companies which offer consulting/professional services to their customers.
The business model is different for product development and services companies. Following
are some of the business models for IT product development companies,
a. Licensing model
b. Subscription based model
c. Royalty model
Following are some of the business models for IT services companies,
a. Time and Material
b. Fixed cost
c. Off Shore Development Center (ODC)
d. Delivery based model
e. Software As A Service (SAAS)
Following section explains in detail the various business models listed above.
Business Models in IT Industry
a. Business model for product development companies
Product development companies offer their innovation to their customers in the form
of software/hardware product. These products help their customer in solving their
business problem. Some examples of product development companies are – Microsoft
(develop software tools for application development), Mentor Graphics (develop
software tools for hardware design and validation). Application development
companies need software tools for developing applications and those applications can
be sold to enterprise users. Examples for application development companies are
SAP, ORACLE and examples for enterprise users include – BHEL, Infosys.
Following are some of the business models for product development companies,
1. Licensing model
In this business model, companies develop products and sell the license to their
customers. The price of the product ranges between Rs: 10 to few Million. There
are various types of licenses to match the needs of various customers. Different
license model used by companies include – single user license, multi-user license,
user locked license, node locked license, floating license, volume based licensing,
fixed period license, evaluation license.
Example: Microsoft Windows 7 Operating System, Microsoft Office 2007, Adobe
Photoshop, Adobe Framemaker, etc..
2. Subscription based model
In this model, customers pay subscription fees to the company, to access their
Example for this model is: start-up semiconductor design companies cannot afford
to purchase hardware design tools which costs few Million Dollar. In order to
make the company’s product accessible to such target customers, product
companies allow their customers to access their products for a limited period of
time for a subscription fee.
The key difference between fixed period license and subscription model is, in
fixed period license, the customer owns the product. After the fixed period, the
license expires, and the customer cannot use the product. If the customer wants to
use the product, he pays for another fixed period license (does not pay for the
product). In subscription model, the customer does not own the product, but uses
the product for a specific period by paying the subscription fee.
3. Royalty model
In this model, company patents their innovation and gives exclusive rights for
their customers to use their patents in their product/service, for which the
customers pay royalty fee to the company.
Example for royalty model – royalty paid by OEM (original equipment
manufacturer) for using the software product in their equipment. Example of
OEM are car dash board manufacturers.
b. Business model for services companies
Service companies offer consulting/profession/other services to their customers. The
services offered include – new product development, build and test, packaging, and IT
infrastructure and maintenance.
In this competitive world, product companies are focused on their core competency
and does not want to invest money and resource in no core activities like –
maintenance, testing, packaging. So these activities are outsourced to service
companies. Service companies employ any of the following business models to work
with their customers:
1. Time and Material
In this model, the service provider offers their resources (skilled labours) to
dedicatedly work for the product company. In turn the product company pays
service fee for getting the service. In this model, it is the responsibility of the
product company to assign work/task to the resource. Periodically, the product
company pays service fee to the service provider for the work executed by the
Example: Indian IT companies like Infosys, Wipro, TCS use this business model
to offer services to their customer.
This model is very popular for maintenance and enhancement related work. This
model is always advantage for service provider, as they will get the service fee
periodically – irrespective of the work done by the resource.
The disadvantage of this business model for Product Company is, sometime the
resource might not have any work, for which the product company has to pay
service fee to the service provider for the idle resource.
2. Fixed cost
In this model, the product company pays a fixed fee to the service provider. It is
the responsibility of the service provider to deliver the service to the company.
This model eliminates the disadvantages in time and material model for the
product company. This model is a challenging for the service provider. If the
service provider does not have the capability to create and deliver the service, then
the service provider shall incur a loss by executing such projects.
In this model, the risk of the project is transferred to the service provider.
3. Off Shore Development Center (ODC)
In this model, the service provider acts as an extension to the product company.
The service provider offers software engineering, maintenance and support
facilities to the product company. The service provider creates a team on behalf of
the product company.
This model is ideal for product companies which do not want to spend huge
money on the software engineering, maintenance and support facilities in their
country. To save money, product companies approach service provider to develop
a dedicated development center in low cost countries.
Example: ODC center established by Indian IT services companies for customers
like Cisco, etc.
4. Delivery based model
This model is similar to time and material based model. The key difference is in
the payment of the service fee. The company pays the service provider for the
work delivered to the company. This eliminates the disadvantage of paying to an
5. Software As A Service
In this model software application is offered as a service to the customer. The
customer pays the service provider based on his usage. This model is also called
as “software on demand service”. The service provider purchases the necessary
hardware, software and application and offers the application as a service to the
customer over internet. In this model, the customer need not invest money in
acquiring hardware and software resources for his business.
Example: Web based sales force automation, web based CRM. SMEs can pay for
the hosted service and SME employees can use the application for their business
operations, without investing in hardware and software resources and need for a
dedicated resource for managing these IT resources.
Needfor innovative business models
Top Indian IT companies have grown significantly over a period of time, employing more
than 0.1 million people in a company. The sales and profit growth of these IT companies
came by increasing the head count in the company. Now these companies have reached a
saturation point, beyond which they cannot increase the head count because of “economy of
scale”. To continue maintaining their top line growth, these IT companies has to increase
their profit without increasing the head count. So these service companies are working on
creating a new business model, which will help them grow non-linearly.
It is important for any business to identify the right business model for their business. For
service providing companies to grow non-linearly with the head count, service providers can
explore new business models like royalty model, licensing model, which will help them to
deliver the service faster and cheaper to their customers.
Global warming is defined as the increase in the average temperature of earth surface. The major
reason for global warming is Pollution, (i.e) emission of carbon di oxide. Power plants which uses fossil fuel
to generate electricity, emits maximum carbon di oxide to the atmosphere. Automobiles using fossil fuel
pollute the atmosphere by emitting harmful gases like carbon di oxide, nitrous oxide. Other reasons for
pollution include, burning of oil during winter, deforestation and transportation industry (airways, railways
Effects of Global Warming:
Increase in earth surface temperature has impact on the following systems and the consequences have
chain reaction impact on its subsequent systems.
Glaciers – Rise in temperature causes the glaciers to melt, resulting in increase in sea level. Increase in sea
level leads to flooding of land.
Mixing of pure water from melting glaciers with salty sea water alters the gulf-stream pattern which regulates
Melting of glaciers alters the balance of eco system in the polar region which includes – animals, plants.