Cloud Pricing
Pricing models for cloud services are maturing, and range from free and ad-based models to pricing based on volume, transaction, or user, as shown in the figure below.
Pricing structures for the cloud are based on a various factors ranging from storage space needed to clock cycles used to monthly traffic allotments, and it does not end here. Sometimes there are additional charges hidden deep within service-level agreements (SLAs). To arrive at a total pricing for a cloud service, user organizations must take note of individual service elements that a provider bills for and how these are calculated. Does the provider, for instance, bill based on within server traffic, storage space needed, server CPU time or a combination of these factors along with other elements?
Another critical factor in determining the total cost is the type of service required. For some users, the service may be a little more than a hosted, dedicated server to running applications in the cloud. For others, the service may be cloud-based backup or business continuity or basic hosted storage.
The easiest way to break down pricing is to focus on the primary services offered. Most cloud service providers break down their services into three primary areas: servers in the cloud, storage in the cloud, and sites and applications in the cloud. Each is governed by its own formula for pricing.
Costs
In order to determine a pricing model that provides business value to an organization using cloud services, it is necessary to know the direct and indirect costs of providing these services. For e.g., in the case of an IaaS deployment, the cost can be modeled as a fully loaded cost per server or per virtual machine.Costs can be initial or ongoing. Initial costs, also known as capital expenditures, or CapEx, include the costs to acquire assets such as hardware and facilities. These include:
- Facility construction or acquisition
- Power and cooling infrastructure
- Server, network, and storage hardware
- Software licenses, including operating system and application software
- Racks, cables, and installation
Ongoing costs, also known as operational expenditures, or OpEx, include all costs for keeping the business or facility running. These include:
- Payroll
- Facilities maintenance
- Hardware maintenance
- Software maintenance
- Other fees such as insurance, legal, and accounting fees
- Backend cost, which includes manpower cost of support teams and the entire support infrastructure, which may comprise of partner eco-system.
Determining the cost of the cloud
Both capital and operational expenditures are taken into account to calculate the monthly costs for a cloud computing deployment.
For capital expense cost items, the cost of each item needs to be amortized over the life of the item. Typically servers have a lifespan of 3 to 5 years, while data center facilities have a life of 10 to 15 years.
The formula to calculate a monthly cost, using a simple straight-line depreciation model is:
Where: R = is the monthly cost of money or inflation rate (for example, 3%/12)
N = life of the item in months
By combining the monthly costs for the operational expense items with the calculated monthly costs for the capital expense items, the total monthly costs of the cloud deployment can be determined.
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.
| Elastic Pricing or Pay-as-you-use | Subscription pricing or Fixed Cost Model |
| No subscription, only pay for what you use How?
Choose this model when you:
|
Fixed fee subscription How?
Choose this model when you:
|
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
| Item | Type | Name | Pricing type | Cost |
| 2001 | Virtual Machine | Compute Profile 1 | Monthly Rate | $20.00 |
| 2002 | Virtual Machine | Compute Profile 1 | Hourly Rate | $0.30 |
| 2003 | Virtual Machine | Compute Profile 2 | Monthly Rate | $21.00 |
| 2004 | Virtual Machine | Compute Profile 2 | Hourly Rate | $0.70 |
| 3001 | Physical Machine | Blade 1 | Monthly Rate | $120.00 |
| 3002 | Physical Machine | Blade 2 | Monthly Rate | $210.00 |
| 4001 | Network Services | Bandwidth | Usage/GB | $0.02 |
| 4002 | Network Services | Load Balancer | Monthly Rate | $130.00 |
| 4003 | Network Services | Firewall | Monthly Rate | $80.00 |
| 4004 | Network Services | VLAN | Monthly Rate | $2.00 |
| 4002 | WAN | VPN | Monthly Rate | $299.00 |
| 5001 | Storage Data Services | Encryption | Monthly Rate per GB | $0.01 |
| 5002 | Storage Data Services | Daily Backup | Monthly Rate per GB | $0.10 |
| 6001 | SLA | Bronze | Multiplier | $1.00 |
| 6002 | SLA | Silver | Multiplier | $0.10 |
| 6003 | SLA | Gold | Multiplier | $0.15 |
| 6003 | SLA | Platinum | Multiplier | $0.25 |
| 7001 | Security | Compliance -PCI | Multiplier | $0.10 |
| 7002 | Security | Isolation – Physical | Multiplier | $0.10 |
Another alternative is to offer tiered pricing based on volume of services consumed, with “unlimited” possible as the largest available unit.
Cloud Computing adoption in India – Ernst & Young
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 contractbased 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.
