Words like revenue model and compensation model sometimes signify a reluctance to talk of price models, maybe because the word price seems too commercial. To be compensated for something implies a fair payment for the cost and trouble a supplier has, maybe on a no-profit basis.

If we look more closely the distinction is not so clear. Suppliers need to get paid. Not only for direct costs when they do something for a customer or a user, but also for things which are not always easy to link to a particular delivery: equipment, premises, competence and solutions developed earlier. Even without a profit motive cost calculations can be rather tricky. (For reports in Swedish by some of us at CASIP go to www.konkurrensverket.se)

Fair remuneration and unfair prices?

In order to develop improved compensation or remuneration models, emerging knowhow on price models is therefore highly relevant. A price model concerns a particular business deal and describes what is included and what determines payments. Examples we all are used to include mobile phone contracts: fixed and variable fees, pots and duration differ between suppliers. Which contract suits whom best, and how supplier and customers reason when they design and choose between different options, are some of CASIP’s key research areas. Price as a strategic selling point!

Using the word price rather than remuneration or compensation puts the emphasis on how customers react. A fixed fee for you mobile phone may lead to higher usage than if consumption affects your monthly bill. In this example this fee may actually match operators’ costs, as each call or message hardly makes a difference. But if fixed fees lead to demand which has to be met through additional capacity this will no longer be true. A price model with different prices over the day, or for different days of the week, would then reflect long-term cost more fairly.

In a market economy one basic idea is that prices adapt over time, making it possible for suppliers to produce what customers value, and for customers to pay the costs they cause. If it is no longer individual goods or services that cost, but for instance access to a network, or a hospital nearby (even when we don’t visit it), then we need price and remuneration models which allows us to pay for these.

Compensation models are price models!

Both companies and public activities need price models that provide fair compensation for costs, and as users we need to show our preferences for different “bundles” of goods and services through price models which allow a rational choice. When a firm or a public utility buys goods and services the same is true. Within a state, a region and inside corporations similar models are needed in order to agree on how supplied goods and services should be accounted for. Like mobile phone contracts such agreements are usually long-term, and both buyer and seller should be happy about the deals. They should also have incentives for joint improvements: increased quality through new methods, and joint initiatives for the future.

Compensation models should then mirror the experiences being won through innovative price models. What should be included in an agreement? What is the basis for prices? How are they linked to different aspects of the deal?

At CASIP we find innovation in price models and revenue models particularly intriguing and challenging. By linking prices to different factors and mixing fixed and variable compensation prices impact behaviour. What is right for your industry and your organisation?