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Cloud Pricing Models Article

Understanding Cloud Pricing Models In Today’s World

Understanding Cloud Pricing Models

Elastic pricing or Pay-as-you-Use model

Under elastic pricing for cloud pricing, customers are charged based on their usage and consumption of a service. An elastic pricing structure makes users keenly aware of the cost of doing business and consuming a resource, since the cost comes out of their pockets, or, in the enterprise world, their own budgets. And with awareness of the costs comes more efficient and selective usage, thus resulting in less waste and lower costs.

Fixed or Subscription based pricing

Fixed recurring pricing is the simplest pricing option, where the customer organization is billed on a fixed monthly basis. For example, a virtual machine can be offered at a fixed cost per month. The consumer is billed the same amount every month without consideration for actual usage.

The table below shows a sample-pricing model for an IaaS deployment.

In this plan, virtual machines are offered both on a monthly rate and at an hourly rate.. Bandwidth is priced either at for data transferred or fixed bandwidth plans. Some services, such as data encryption and data backups, are priced based on the data size in terms of GB. SLAs are priced as multipliers of the base virtual machine rates.

(Sample pricing plan for IaaS Deployment)

Another alternative is to offer tiered pricing based on volume of services consumed, with “unlimited” possible as the largest available unit.

A recent survey by Ernst & Young on Cloud Computing adoption in India presented the following findings:

Majority of the respondents opting for an annual contract-based model are large enterprises, while the majority of SMB segment prefers the resource-based usage model.

At this stage, a single pricing model is unlikely to satisfy all potential customers in the market. Vendors need to have pricing structures that are easily understood, transparent and offer substantial benefits in terms of cost savings.

Options for alternative pricing models are:

  • A true pay-as-you-use model based on the use of resources such as per hour usage or CPU cycles consumed will be attractive to the SMB segment.
  • More flexible models integrating the features of usage and contract based pricing can be developed, where server instances can be charged on a daily or monthly basis instead of hourly.
  • Reserved instances with discounts on hourly rates can be more cost-effective for larger enterprises with visibility on demand. Reserved instances are likely to help large enterprises better estimate and plan their cloud IaaS needs.

Spot pricing for cloud

The concept of market-based pricing takes on a new meaning in cloud business models with Amazon.com introducing a spot market for its EC2 services. Market forces govern the spot-pricing model i.e., when computing and storage resources are in high demand, the spot market will drive the price of services higher. Conversely, when resources are in low demand, the spot market will drive the price lower offering opportunities for bargain hunters.

Cloud chargeback

Chargeback is a term used in IT (cloud computing) and implies the cost charged for providing cloud computing services to organizations for using cloud services: that is, making the consumer pay for the usage.

 A chargeback model in the cloud delivers many benefits, including:

  • Correlating utilization back to cloud consumers or corporate departments, so that usage can be charged if desired

  • Providing visibility into resource utilization

  • Facilitating capacity planning, forecasting, and budgeting

  • Encouraging the use of emerging technologies, which might be priced lower than other services as an incentive (For example, virtual machines will cost less than physical servers)

  • Bringing transparency to enterprise IT, which is a pivotal step in the transformation of enterprise IT from a cost center to a business enabler

  • Providing a mechanism for the enterprise IT function to justify and allocate their costs to their stakeholder business units

While designing a chargeback service, a cloud service provider must take note that the chargeback model should be:

  • Accurate: assess charges for actual resource usage accurately and fully

  • Auditable: store and retrieve detailed records on all charges to handle billing inquiries and disputes

  • Flexible: modify easily to handle pricing variations, for example, for promotions and specials that might vary over time or by region

  • Scalable: scale components easily to handle cloud-sized workloads

The methodology for defining and deploying a chargeback service can be applied to private or public clouds, as well as hybrid clouds.

Still a long way to go…

Leading analysts such as Gartner, Inc. believe that within five years almost all corporations, organizations, and governmental agencies will leverage the cloud. The reason being – the cloud brings much needed agility not just for IT, but also for the business as a whole and allows organizations to focus on strategic business issues. The cloud also enables organizations to realize significant cost savings on account of transforming capital investments to operating expenses.

The adoption of cloud technology is being driven by the trends like reducing product lifecycle, aggressive time to market, increasing risk of technology obsolescence, proliferation of new devices, applications getting resource intensive, increase in mobile forces, and the organizational need to focus on core competencies. Most significantly, these developments foretell the changing role of IT within the enterprise toward becoming a true partner to the business.

The three different service models for the delivery of cloud computing, IaaS, Saas, and PaaS, provide enterprises with the ability to mix and match the best service model to the business needs of their organization based upon requirements and payment options. The availability of cloud infrastructure options, including private, public, and hybrid models, enable enterprises to pick and choose the best cloud technology depending upon the vertical industry, regulatory requirements, risk tolerance, and the specific applications portfolio.

From a pricing perspective, Cloud service providers need to understand who the buyer (business or IT decision maker) is for their cloud services and tailor their pricing models to accommodate buyer preference. Some providers will find that their brand and reputation will allow them to price based on value delivered from their services, rather than purely based on hourly usage rates. The challenge is determining how to measure this value and how to capture that value through pricing. In future, strategic customers will command better pricing and higher levels of service.

It is obvious that cloud providers have their work cut out in terms of simplifying pricing models, beefing up security and providing SLAs that guarantee better reliability. The market is evolving fast, and today’s dominant players could be history in a quarter’s time!

By Gopan Joshi

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Gopan Joshi Contributor
Product Manager – Netmagic Solutions Pvt
Gopan is Product Manager: Cloud Computing Services, Netmagic Solutions Pvt. Ltd. and has expertise in managing products and services in various market scenarios and life cycle stages. His experiences ranges from introducing cutting edge innovations in existing products, existing markets to new technology, new markets.
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