Addressing the conundrum of Cloud pricing is a challenge that can occupy ISVs transitioning to the Cloud for quite some time, at least in the first few years. And many more mature Cloud ISVs, though they have settled into a Cloud pricing strategy, still may not fully understand the range of options open to them, nor how they might rethink their Cloud pricing.
Little has changed since we first addressed the issue of the value metric in 2007 (344STR, SaaS Pricing: The Value Metric Is Only the Tip of the Iceberg, 3May2007).
As we noted back then, it is still the case that:
“Successful SaaS pricing is all about understanding the customer. It must appeal to the customer intuitively and must seem fair. It must show immediate returns to the customer and promise future value.”
Four of the best known pricing models are consumption, subscriptions, site licenses and auctions. These models are in turn based on different variables and calculated using very different processes. Each model may be more suitable for a specific kind of Cloud offering.
Figure 1: Four Familiar Cloud Pricing Models
Source: Saugatuck Technology Inc.
For example, consumption pricing usually requires metering to track usage, although basic, rudimentary consumption pricing may be based on simple time or transaction counts. However, metered usage may also make use of a rating engine (see Note 2) that calculates usage according to a service agreement and rate plan. This can get exotic and may include flat rates, elapsed-time rates, tiered rates, bracketed rates, metered-usage rates, day-of-week rates, time-of-day rates, or some combination of them and may also consider the license type, whether named or unnamed users, pooled or concurrent users, and so on. MetraTech introduced in 4Q2012 a “Real-time Commerce Decision Engine,” based on an extensible metadata-driven architecture that makes it possible to model services, introduce services and pricing plans, including products, services, groups of accounts, usage types, charge types, utilization or commitment tiers, resellers, national jurisdictions, and multiple currencies and to change them in rapid response to market demands. That modeling capability makes what-if pricing a practical reality for the first time.
Subscriptions, site licenses and auctions are three other familiar approaches to the value metric. “Per user per month” became a popular part of the IT vocabulary thanks to the early Cloud leadership of salesforce.com and other SaaS pioneers. However, the value metric has never been the whole story. The job of the value metric is to provide a proxy for the value provided by a Cloud solution and, typically allows the buyer to estimate the bottom line price; that is, before add-on services and options are included in the total Cloud solution bundle. The same goes for site licensing, with tiers making it easy to guess at the vanilla bottom-line price before all those enticing extras. Auctions are popular in the Cloud as a means of pricing products, e.g., on eBay, but typically do not apply to Cloud solutions with the former exception of Amazon Web Services, now discontinued as a pricing mechanism. The use of time-of-day Cloud pricing serves a similar function for the provider by maximizing infrastructure utilization through lower execution prices for under-utilized day parts.
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