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Demand Variation in Output-Based Pricing Contracts
Executive Summary
With the increasing maturity of the outsourcing space, buyers and suppliers recognize the benefits that a sophisticated pricing model like output-based pricing brings to the table. This has led to increased adoption of output-based pricing through two means:
- Transitioning from an existing input-based pricing model to an output-based model in an existing outsourcing relationship
- Initiation of fresh outsourcing initiatives leveraging output-based pricing
Buyers need to overcome unique challenges in both cases in order to realize completely the potential benefits of the output-based pricing model. Developing adequate mechanisms to handle demand variation is, however, a key challenge in both situations.
This whitepaper highlights some situations where variation of demand assumes high significance and explores the possible issues that can arise as a consequence. It also illustrates the use of mechanisms that can be instrumental in resolving this problem.
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