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BACKGROUND
The capacity and value-based pricing (CVBP) model for professional services was derived out of a need for a new way to think about how professional service 'products' should be priced in a competitive marketplace. In general, the price of any good should represent an aggregate of the value assigned to the various attributes of the good (for which there may be a rather large number). For services, in particular, there are several views on how this pricing decision should be undertaken. Traditionally, the pricing decision in professional services has fallen into the category of what is called 'cost-plus' pricing; see for example Scardino et al. (2005). Cost-plus is the idea that service engagements are priced based on the costs incurred by the provider in supplying their services plus some pre-determined margin on these costs. While this is a feasible way to price service goods, it is not necessarily the most effective way, with respect to overall profit, to approach the pricing problem.
In the face of this de facto pricing method companies have sought ways to more accurately price their products based on the value that is provided to the client. It is our assumption that if pricing is more closely correlated with value, then profit margins can be increased without having to significantly increase staff or workload. It was in this vain that the CVBP model was developed, in an effort to systematically correlate 'value', along with several other attributes, into the price of professional services. The 'stand-alone' value of the product is essentially one dimension of the pricing grid, and should be considered in the context of other variables, such as available capacity, when determining the price of a particular service. The term 'stand-alone' value is meant to connote the value of a product absent of external factors such as time, delivery, competition, etc.
While this may seem contradictory, it is easily understandable if one thinks about the products that consumers purchase. For instance, one may have some perception about chewing gum. However, depending on what time of day it is or the situation in which one finds oneself, the value we subscribe to chewing gum changes. An instance of that may be after a meal or before a meeting, when the...