Optimal strategy when selling Software-as-a-Service

Software-as-a-Service (SaaS) is a brand new selling strategy for enterprise software developers and it spreads quickly in the recent years. In this paper we develop a dynamic model with state-dependent demand and quality decisions to describe the revenue and cost structures for the firm who is the software service provider. We show that there exists a unique optimal strategy for the service provider to set the service quality dynamically in order to maximize its total expected profits. We further extend our model to include some considerations about customer behavior and show that the optimal policy strongly depends on the parameters of customer behavior.