Optimal Pricing and Introduction Timing of Technology Upgrades in Subscription-Based Services

Abstract

Many technologies that fuel subscription-based services improve over time. Examples are mobile phones, software suites (Microsoft Office, Adobe Creative Cloud), subscription services (Netflix), and cloud service providers. Additionally, modern subscription services are increasingly personalized to individual subscribers, and as a result, discriminatory pricing is ever-present in the marketplace, allowing firms to reward existing customers with discounts and special offers on upgrades. However, customers may be averse to switching to improved services because of costs related to redesigning business processes, downtime, or customer inertia. We propose a model of technology upgrades featuring discriminatory pricing based on customers’ upgrade experience. We characterize the optimal pricing policy for the service provider and develop an efficient algorithm for computing optimal prices. We also characterize the optimal timing of technology introductions and show that it is generally optimal to introduce new technologies in periodic intervals after some time.