7 Cloud Computing Pricing Model

A significant amount of innovation has gone into pricing Cloud Computing services correctly. Unlike fixed-price models of IT resources with definite demand projections, the pricing of Cloud Computing is based on amount of resources allocated. This makes Cloud pricing constitute a significant portion of variable pricing. Think of Cloud pricing model similar to the utility services you consume. You pay electricity bill for the number of units you consumed, or the amount of your water consumption bill is proportionate to the amount of consumption. The bill varies as per your consumption. While the pricing of Cloud computing is similar in concept, there is a slight variance as compared to the utility service pricing. The shift from fixed-price model to variable-price model mainly happened due to the fact that not all users have the same need; hence charging them for units they don’t consume is not considered fair. Cloud Computing pricing varies according to its various models. A SaaS model will be priced differently than an IaaS model. The table below shows the key components of Cloud pricing based on the Cloud service model.

IaaS

Amount of resource allocated

No. of physical or virtual machines, IP addresses, firewalls, load balancers, virtual machine images, virtual local area networks (VLANs)

PaaS

Usage of Computing platform

Operating systems, hardware, programming language execution environments, servers, and databases.

SaaS

Usage of software applications

No. of software licenses

Cloud computing pricing consists of two main approached – fixed and dynamic. In fixed pricing, the customer the same amount at all times. This includes the pay-per-use model, in which the customers pay for the amount they consume of a product or the amount of time they use a certain service. In dynamic pricing, the pricing varies according to the level of consumption, service features, Quality of Services (QoS), etc. A new pricing model that is being increasingly adopted is the market-dependent pricing; this pricing depends on the real-time market conditions such as bargaining, auctioning, demand behaviour, and yield management.

Note the key drivers of Cloud Computing pricing are on-demand self-service, range of network access, speed of elasticity, resource pooling, and quality of service. The most important factors that influence pricing in cloud computing are:

  • Initial Costs: This is the initial setup costs the service provider spends to buy resources.
  • Contract Period: This is the period the customer will lease resources from the service provider. Longer the contract period, lower is the subscription price.
  • Quality of Service: This is the quality of service the service provider guarantees to meet. This is the mostly debated component of Cloud pricing. Better the QoS guaranteed, higher is the pricing.
  • Age of resources: This is the age of the resources employed by the service provider. The older the resources are, the lower the price charged will be.
  • Cost of maintenance: This is the amount the service provider spends to maintain the cloud service.

In general terms, the cloud pricing model consists of three main components: actual cloud pricing approach, Quality of Service (QoS), and Utilization/Contract Period.

Figure – Key Components of Cloud Computing

As mentioned earlier, Cloud computing pricing models have undergone tremendous innovation and changes in recent years. Partly due to the fact that a Cloud service provider’s incoming cash flow may decrease because of consumers’ preference for pay-per-use mechanism, industry has come up with various Cloud pricing model. The table below provides a quick summary of these models.

Pricing Model

Approach

Pay-as-you-go model

Price is set by service provider and remains constant

Subscription

Price is based on the period of subscription

A novel-financial economic model

Usage-based

Pay-for-resources model

Cost-based

Pricing algorithm for cloud computing

Real-time pricing

Dynamic resource pricing on federated clouds

Auction-based pricing

Genetic model for pricing in cloud computing markets

Real-time pricing

Datacenter net profit optimization with individual job deadlines

Based on job scheduling

Value-based pricing

Price set according to the value perceived by the customer

Cost-based pricing

Price set by adding a profit element on top of cost

Competition-based pricing

Price set according to competitors’ prices

Customer-based pricing

Price set according to what the customer is prepared to pay

Hybrid pricing

Price changed according to the job queue wait times

In short, the underlying theme of Cloud computing pricing is “pay-as-you-go” model. It is advised to prospective consumers of Cloud Computing services that they should negotiate adding Quality of Service (QoS) attributes to the pricing set by Cloud service providers. This will ensure that the pricing is not biased towards the service provider; and they have a pressure to deliver on consistent performance and Quality of Service.