Dynamic quality decisions of software-as-a-service providers based on customer perception

Software-as-a-service (SaaS) allows customers to use software over the Internet by paying a subscription fee rather than by buying shrink-wrapped software and installing it on their computers. To maintain customer interests in SaaS, the provider's dynamic quality decision is important. Thus, we consider a dynamic programming model that assumes demand is quality sensitive and influenced by customer perception. In both finite and infinite planning horizons, we show that a unique optimal policy exists for the SaaS provider to set quality periodically. We demonstrate that the SaaS provider may have a constrained opportunistic behavior towards its quality decisions when considering customer perception. This behavior results in a transient fluctuating quality decision path before it converges to a steady state. We find that the software's initial quality plays a critical role in long term decisions, and that customers' expectations of quality improvement positively affect the quality, although the actual improvement may not meet their expectations. (C) 2013 Elsevier B. V. All rights reserved.