Price models – how to capture value in a business ecology

A business model should give answers to how an organization intends to create and
capture value in the business ecology that it’s a part of. Value creation, as well as value
capturing, is heavily dependent on the pricing strategies that the organization applies.
Without well-grounded price models that identifies necessary value creation conditions
(price models addressed by partners and sub-contractors), and conditions for value
capturing (price models addressed towards customers), there is a great chance that the
business model won’t be realized.

As the digitalization of the society has increased, so has the possibility to develop
innovative price models. In the wake of it a myriad of price models that challenge
prevailing branch standards have occurred. But what are the actual ingredients of a
price model?

The five dimensions of a price model

The research performed by CASIP has enabled us to identify five dimensions that
altogether constitute the ingredients of price models. The Scope of an offering, the
temporal rights, actors influence on pricing decisions, the price base, and the price
formula. Below follows a description of all of these five dimensions.

Price model equalizer


In this dimension of the price model it is constituted what is the core of the
product and what is at the outer edge of it. The product can be a system, or package,
consisting of many different functions or attributes that are priced together as a whole
(e.g. an all-inclusive trip). Opposite to this the offering can be priced based on single
attribute level, where the customer can choose which attributes are of interest and pay
for them separately (e.g. a trip where you separately book flights, trains,
accommodations, etcetera).

Temporal rights

Dimension number two in the price model deals with five different
types of temporal rights that a customer can obtain when buying product. It can be pay-
per-use, which means that the customer must pay each time they use an offer (e.g. pay
for each visit at the theater). Then there are different variants of time-limited rights
from subscription (pay in advance for something that is not fully developed, e.g. a
streaming service), rent (access for a certain time, e.g. a car rental for a weekend), and
leasing (access for a certain period of time with the possibility of buying eternal rights,
e.g. private leasing of cars). The opposite of the pay-per-use is perpetual, which means
that a customer can theoretically utilize the offer forever and at the same time have the
sovereign and unlimited right to sell the price object if they want (e.g. traditional
purchase of a car).


The next dimension in the price model illustrates the power balance
between buyer and seller regarding the actual price decision. A price model holds six
different ways in which buyers or sellers may influence a price. If it is determined
exogenously, neither the seller nor the buyer has power over the price decision. Instead
it is entirely external factors that determine it (e.g. commodity prices on a world
market). The influence gradually increases for both parties depending on whether the
price is determined by auction, if the customer gets to pay-what-you-want (e.g. when
visiting cultural heritage institutions), if the price is result-based (e.g. brokerage fee) or
if it is negotiated (e.g. buying service from a craftsman). The other extreme in the
influence dimension is that the seller has complete power and the buyer is offered a
fixed price list (e.g. what we usually encounter as customers in a grocery store).

Price base

The fourth dimension of a price model contains three different stages that
affect the price level. Is it based on calculations of costs that have occurred during
development, production, distribution and sales? Or is it based on the price the
competitors are offering (taking into account if your offering is over or underperforming
in regard to competitors)? Or is the price set based on the value customer perceives in
the offering?

Price formula

The fifth and final dimension of the price model describes how the
price relates to quantity. Here we find five different types of formulas, one of which is
totally voluminous, i.e. price per unit (e.g. per liter of gasoline). Furthermore, there are
various combinations of volume-variable and fixed price formula, such as per unit up to
a certain ceiling (e.g. parking fee per hour up to 6 hours and then for free) or purchase
volume to use up and then you pay per unit (e.g. a certain volume of mobile phone
internet surf that you can use, then you pay for each additional megabyte of surf), or a
fixed price to access the product and then when you use it you pay per unit (e.g.
electricity subscriptions). The fifth price formula is fixed price, i.e. you only pay one
price regardless of how large or small the volume you use (e.g. subscription to a
streaming service).