Risk Theory and Pricing of "Pay-for-Performance" Business Models

Abstract: Technology trends as digitalization and Industry 4.0 initiate a growing demand for new business models. Most of this models requires a fundamental shift of operational and financial risks between seller and buyer. A key question is therefore how to include additional risk pricing and hedging. In this paper we propose a new approach for a risk theory of innovative performance based business models as "Pay-for-Performance" or "Product as a Service". A new model and calculation method for determination the risk premium is presented. It contains beside financial price fluctuations also operational failure behaviour of products. We apply the model for a typical industrial application and simulate the pricing dependency for different cost distributions.