Costs of Information Services and Information Systems: Their Implications for Investments, Pricing, and Market-Based Business Decisions

Costs of Information Services and Information Systems: Their Implications for Investments, Pricing, and Market-Based Business Decisions

Steve G. Parsons (Washington University, USA)
DOI: 10.4018/978-1-4666-4983-5.ch002
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Abstract

The large number of cost terms in use regarding information services contributes to confusion in discussion and cost analysis. This confusion can largely be resolved by focusing on decisions rather than on products and cost terms. This decision focus is consistent with the proper application of total cost of ownership approaches and a real options perspective for evaluating managerial flexibility. Information services also tend to display public good-like characteristics. The non-rivalrous nature of production (i.e., low marginal cost of production) and the perishability of services have critical implications for investments and complex pricing. In addition, some information services and other Internet-based services, can display network effects, which also have important implications for managing the life cycle of the service. Finally, the implications of big data for information services are briefly considered.
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Cost Terminology And Confusion

Unfortunately, costs are often misunderstood, or misused, in a variety of industries and across departments within companies and government agencies. Often, classic cost terminology actually can lead to more confusion than clarification in a decision-action context.

Consider the following list of typical cost terms and cost phrases, listed in alphabetical order, but not intended to be exhaustive: accounting cost, activity based cost, administrative cost, average cost (often in combination with other terms such as average variable cost),, avoidable cost, capacity cost, conversion cost, cost of debt, cost of equity, cost of goods sold, cost of money, cost overrun, differential cost, direct labor cost, explicit cost, external cost, feature cost, function cost, incremental cost, inventory cost, labor cost, life cycle cost, long-run cost (often in combination with other terms such as long-run average total cost), manufacturing cost, marginal cost, materials cost, minimum efficient cost (the cost at minimum efficient scale), non-manufacturing cost, non-period cost, opportunity cost, overhead costs, period costs, private cost, product cost, public cost, psychic cost, repugnancy cost, search cost, short–run cost (often in combination with other terms such as short-run marginal cost), social cost, standard cost, sunk cost, transactions cost, variable cost, and volume-sensitive cost.

This proliferation of cost terms may in part be due to a desire to have (or create) a cost term that is unique to a specific set of circumstances. However, on balance, I find the proliferation of cost terms, and some cost terminology in particular, leads to more confusion than clarification.

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