January 2001, Volume 52, Issue 1, Pages 64 - 70

Theoretical Paper

Optimal pricing strategies for Internet-based software dissemination H Gurnani & K Karlapalem Hong Kong University of Science and Technology, Hong Kong     Correspondence to: H Gurnani, Department of Information and Systems Management, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong.

Keywords

software dissemination;   information systems;   purchasing;   optimization

Abstract

In the recent past, there have been several initiatives by major software companies, such as Microsoft, to lead the industry towards electronic software distribution. In this paper, we use a monopoly pricing model to examine the optimal pricing strategies for ‘selling’ and ‘pay-per-use’ licensing of packaged software over the Internet. Traditionally, software distribution included outright sale as well as short/long term renting. With the Internet fast becoming a prevalent mode for disseminating software, a customer can download and use software on a need-by-need basis. For the software vendor, offering the pay-per-use option to the consumer provides for a steady source of revenue and obviates the need for physical distribution, purchasing and inventory management mishaps. We examine the following issues in this paper: (i) what are the extra benefits to the software vendor for providing the pay-per-use option?; and (ii) does the market size change? The contribution of this paper is to show that pay-per-use is a viable alternative for a large number of customers, and that judicious pricing for pay-per-use is profitable for the software vendor.

Received July 1999; Revised July 2000;

^© Macmillan Publishers Ltd 2001