How Cloud Pricing Works

Rooting out cloud pricing savings is a worthy operational goal, given the average cost of cloud services for large-scale organizations. Data reported by Synergy Research Group reveals that enterprise spending on cloud infrastructure services reached almost $130 billion in 2020 — a 35% annual increase. 

The cloud services market is bursting with primary providers and third-party add-on vendors, making it a challenge to sort through the noise to land on the best choices.

That’s why we’ve put together this high-level look at cloud pricing models and strategies for cost savings. When it comes to selecting the right cloud services at the right price, a little knowledge can go a long way. 

Cloud pricing models

Pavan Vadapalli, director of engineering at upGrad, identifies nine primary cloud pricing models in his article, “What Are The Cloud Cost Models?” These include:

• Service-based
• Performance-based
• Customer value-based
• Market-based/free upfront
• Auction-based
• Retail-based
• Expenditure-based
• Resource-based
• Utility-based

Service-based cloud pricing models, Vadapalli says, are commonly used by industries like banking, travel, legal consultancy, medical organizations and insurance companies. These models typically offer predictable, identifiable pricing structures in the form of levels or tiers, based on number of devices or users. 

Performance-based cloud pricing models are connected to client business outcomes, according to Vadapalli. For example, performance-based model pricing might be linked to mobile app performance metrics or the reliability of satellite connectivity.

Customer value-based cloud pricing models are more subjective. Pricing is set by vendors based on the subjective view of a client’s value delivery. Vadapalli categorizes these models into four categories: perceived value, features, psychological and “hedonic-based.” This model tends to favor the vendor. 

Market-based/free upfront, pay later cloud pricing models, Vadapalli writes, offer attractive entry points that allow vendors to leverage their products by offering basic features to gain customers while making larger profits from premium clients who require features beyond the basics. The freemium cost pricing model is becoming more familiar to end users who are accustomed to this approach in other sectors, like mobile apps and downloadable software.  

Pricing can be based on auction-based cloud pricing models. End users help to determine prices based on formal processes around bidding.

Vadapalli says the retail-based cost model is based on the small number of customers that make purchases at physical locations. This business-to-consumer (B2C) model includes four subcategories: discount and allowances, promotional pricing, product mixing and discriminatory pricing. 

Expenditure-based cloud pricing cost models are focused on three pricing strategies common in the retail sector: cost-plus, target return and percentage cost. The more profitable a client is, the more value the vendor can derive from the cloud provider contract. 

Resource-based cloud pricing cost models are based on the “consumption of services,” writes Padavalli. 

Finally, utility-based cloud pricing cost models are “metered price models whereby your usage of the service is monitored, and you pay accordingly.” 

See more: Cloud Migration Market 2021

Cloud pricing variables

As supply and demand fluctuate, so do cloud pricing models. Demand drives value-based cost model pricing, while supply drives cost-based models. Vendors using market-based cloud pricing models benefit when there is an equilibrium of both supply and demand. 

Savings opportunities

Organizations should choose the pricing strategy most beneficial to their unique circumstances. For example, organizations experiencing rapid growth or fluctuating revenue cycles would benefit from cloud service offerings like service-based models that can be scaled up and down as needed. 

Cloud add-ons

Vendors offer an exhaustive list of post-sale add-ons that can enhance cloud services, but wise organizations will proceed with caution when considering these costs. Not all cloud add-ons are worthwhile investments. Similarly, not all cloud add-ons are good fits for all organizations. 

Each vendor offers unique add-on options. Here are a few examples from two leading cloud providers: Amazon Web Services (AWS) and IBM. 

AWS Cloud Add-ons

AWS, the leading cloud market provider, offers dozens of add-on options available for use with a long list of cloud products, including:

• Internet of Things (IoT) management tools
• Quantum technology features
• AWS App Runner
• AWS Fargate serverless computing for containers
• Amazon Sumerian for VR and AR applications

A report compiled by 2nd Watch, an AWS consulting partner, identifies several popular third-party add-ons, mostly focused on security features, including:

• Alert Logic Log Manager for AWS
• Alert Logic Threat Manager for AWS
• AlienVault Unified Security Management for AWS
• Barracuda Web Application Firewall
• Cisco CSR1000V: AX Technology Package for Maximum Performance
• Cloud Protection Manager, Enterprise Edition

IBM Cloud Add-ons

IBM offers dozens of potential cloud add-ons related to each of its cloud product categories. For example, within the cloud analytics category, IBM offers:

• IBM Analytics Engine for analytics applications on Apache Spark and Hadoop
• IBM Cloud SQL Query
• IBM Db2 Warehouse on Cloud 
• IBM InfoSphere Information Server
• IBM Master Data Management
• IBM Streaming Analytics dashboard

Organizations that need to maintain meticulous records to comply with industry regulatory compliance requirements could benefit from the offerings found within this category, as could companies seeking to leverage big data analytics with cloud-based approaches. 

Cloud savings 

Beyond selecting the right-fit cloud pricing model, organizations can approach cloud services similarly to the way they make other operational decisions.

For example, the automation some developments use to streamline processes like deployment can be applied to a smart cloud usage strategy where system resources are restricted based on predetermined thresholds for bandwidth use and other measurements. 

Automatic messaging can alert organizations when they are nearing the top of their monthly cloud services budgets, while automated security features within cybersecurity platforms can terminate connections that show unauthorized open ports, which can lead to costly network breaches.  

Organizations that approach cloud services spending with creativity and patience will find there are many solutions for customization, especially if they are willing to partner with multiple service providers. The competition in this market is fierce, but excellent — if somewhat hidden — affordable options abound.

See more: Public Cloud Computing Providers