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Cloud Pricing Models

An analysis of existing pricing models and why there's so much diversity

The current pricing of Cloud services offers a wide range of configuration, choices and price points for the users. This in turn creates a lot of confusion for the buyer as it's difficult to measure the value at a specific price point. The objective of this article is to analyze the existing pricing models and reasons behind why there is so much diversity. In the following four sections, this article attempts to:

  1. Compare approx. 27 models of pricing derived from the scholarly articles
  2. Recommend a derived pricing model relevant to the cloud services.
  3. Validate the model by mapping it to the pricing of services by few key vendors.
  4. Analyze reasons behind the pricing in use by various vendors and future trends.

1. Generic Pricing Models

  • Osterwalder (2004) classified the pricing models around fixed, differential and market based pricing. He suggested that the fixed and differential pricing mechanisms produce prices that depend on customer/ product / Service characteristics, volume, but are not based on real-time market conditions. Market based pricing stands for pricing mechanisms that produce prices based on real-time market conditions.
  • Harmon et al. (2009) suggested a factor based pricing mechanism (cost + value).
  • Denne (2007) discussed various advanced ways to implement pay per use pricing mechanism.
  • Paleologo (2004) suggested that traditional pricing mechanisms such as cost-plus pricing may be inadequate in on-demand services environment due to dynamic factors in cloud computing as shorter contracts, reduced switching costs, customer lock-in, uncertain demand, and shorter life cycles etc.
  • Some authors have also suggested other ways of classification such as resource based Vs. Feature based or Operational (Pay per Use) Vs. Availability (subscription).
  • The table below provides a summary of all pricing models which I believe covers almost all possible ways of pricing and there is a fair bit of overlap in all the studies.

2. A Derived Pricing Model for Cloud Computing
From this article's perspective, we classify the pricing models which are more of less a combination of the discussed pricing mechanisms.

3. Usage Based Pricing (Pay per use) with factor based variations.

4.  Subscription Pricing (Commitment / Reserve / Availability Pricing) with factor based variations.

5.       Market Based Pricing

6.       Pricing Strategy (More relevant from a marketing perspective)

More Stories By Sunil Pathak

Sunil has close to 16 years experience in Information Technology providing leadership, management, planning, system development and engineering, training, people development, methodologies, and process support. He has worked in the area of internet based technology solutions, ecommerce applications, product development, product maintenance, e-business platforms, portals, collaboration, content management, and business intelligence.

He currently works for Colt Technologies Services, Bangalore, India as Head of Systems Development and Support. Sunil holds an Executive MBA (IIM Calcutta), Masters in Technology (IIT Kanpur) and a Bachelor of Engineering in Electrical Engineering. He also holds diploma in entrepreneurship from EDI Ahmedabad. He can be reached at :
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Twitter - @sunil__pathak

Disclaimer:The opinion expressed here are my own and not necessarily those of my employer.

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