Cloud billing models in 2017 and beyond

Posted by Ian Moyse

10-Apr-2015 17:22:00

A guest post by Ian Moyse, Cloud billing models in 2015 and beyondEurocloud UK Board Member & Cloud Industry Forum Governance Board Member 

Cloud solutions, be they SaaS (Software As A Service), PaaS (Platform As A Service) or IaaS (Infrastructure As A Service), and public, private or hybrid in some way, are all growing at a pace, with the options available to customers from a wide range of providers growing on a monthly basis. We are seeing innovation, immense computing power available affordably to all and the delivery of mobile on demand access to both business and consumer communities.

Many assume that in the cloud world the panacea is available now - pay for what you use as you use it, switch services at a whim with little commitment and that it's technically easy to switch-over and swap services at the click of a switch, or at least close to it. We are not yet living in this utopia and there remain many challenges driven by over-promises and assumptions made under the cloud banner. Ideally the objectives of cloud are elasticity, multi-tenancy, flexibility, on demand usage and pay per use and today we see varying levels of achieving these across different offerings and vendors.

Cloud is certainly delivering less costly technology options, increasing competition, rapid and quick changing products and innovation. We are seeing B2C influencing B2B like never before, with increased (and demanded) web and mobile apps access and user experience appearing increasingly high on the list, along with self service as an expectation wherever possible. Customers expect easier ways to buy and digest the IT they want and need, lower costs, more self service and easy ordering and tracking.

The 'pay as you go' billing model

Getting to the 'pay as you go' utility cloud model is crucial for maximising the market reach that cloud can bring to the biggest market segment of SMEs, allowing them to innovate their digital services more cost effectively than was ever possible. Instead of being limited by cost, any firm can be empowered to use vast computing power, when and where needed at a fraction of the cost. Today, what is missing is the bridge between the one or three year typical paid upfront commitments of a SaaS vendor and the other end of the scale of unpredictable hourly usage billing.

This all leads to a need to link pricing to value, to simplify pricing as far as is possible, for transparent pricing and multiple payment options. Increased growth and commodity trading of cloud services would benefit both buyers and sellers, driving standardisation, interoperability and integrations, price reductions and flexibility, but the industry’s current pricing models are to varying degrees standing in the way of this tipping point.  

Cloud pricing is not a licensing fee nor an annual maintenance fee, but a usage fee, a subscription-based payment for a right to use for a period of time. In cloud there are many pricing models already existing from Freemium, flat rate, subscriptions, perpetual, multi-tier packages based on functionality, per user per click and CPU power/storage used etc. In the PaaS and IaaS worlds there is a mix of billing on offer - monthly, quarterly, annual, pay as you go and pay for what you use models. In IaaS charging models, billing may include CPU usage, server type, storage, backup, SLA variations and in PaaS billing takes these same factors into account, adding charges for operating system, solution stacks, hardware architecture and framework costs.

For example, Rackspace, Google and the Amazons of the IaaS/PaaS world all offer cloud calculators that make it easy to select the options, components and variants and see quickly the monthly charge to expect - an example can be seen from Rackspace here. You can select as a customer different entry points and upgrade paths, be billed by consumed usage and choose options for billing and pricing to best suit your demands.

Where is the flexibility promised by cloud vendors?

With SaaS, the largest cloud market segment thus far, the cloud provider is responsible for all components: Platform, Infrastructure and Application, delivering it as a package. In this sector we are not seeing the billing flexibility seen in general across the cloud market, possibly as many of the providers have come from a software vendor background and while they can see customers migrating from their software paid upfront licenses to a cloud model (theirs or a competitor's), they do not want to fully cannibalise their revenue and cash flow models by taking customer payments from fully upfront license bills to smaller usage bills split down to monthly fees.

Another reason we may not be seeing the flexibility is that to handle such flexible or portioned billing models it is imperative that the back-end automation of provisioning, measurement, reporting and billing is in place and delivers with ease the tracking, consolidation and collections as doing this in any way manually will quickly cost the provider highly and outweigh the gained customers. Imagine a mobile phone operator, for example, where you could not get itemised or accurate billing with the incredible number of customers they deal with! Flexible cloud billing and the delivery thereof has inherent complexities which are comparable to convergent telecom billing and should not be underestimated.

In the SaaS space today, the customer is typically seeing a flat rate bill, usually per user per year (although often represented as per user per month for comparison, it is more usual that only annual billing is on option from most SaaS vendors such as Salesforce, for example). It is essential that the cloud provider itself understands the detailed usage breakdown of components in its system, so as to establish the right business model, capacity planning and architecture, but little of this is being shown to the customer, even if they do care or ask to see it.

The cloud form factor has been disruptive already in many other markets and vendors and in the SaaS space we can expect to see disruptions from within, as new or existing vendors choose to lead the way in providing more flexible models to the customer, perhaps giving an option of annual, quarterly and monthly billing alongside a usage billing model with each having their own premiums, similar to what we see in the insurance market (where a monthly billed insurance policy will cost more over a 12-month period than a straight upfront 12-month premium!). It may very well be a telco provider stepping into the cloud space that drives this market disruption (after all they already operate, engage and have the engines to support such potentially complex billing models) and forces others to follow. We are already seeing the likes of Telcos and vendors such as Ericsson stepping up their game in the cloud arena, not willing to miss out on such a lucrative and fast-growth market segment.

True utility pricing in the cloud

A good example of a SaaS vendor leading the way and disrupting the status quo is Kahootz, a British cloud collaboration vendor that through strong success and engagement with the public sector chose to offer SaaS 'on a true utility billing model' to disrupt and gain customer growth and adoption. By offering its 'pay as you go' active pricing for larger clients, Kahootz brings a low commitment (ten users for three months) with an easy way in and out of contracts. It charges only for users who actually log in during a given month, meaning no paying for unused licenses (the old shelf-ware of the software market) and no double counting of users, while providing customers with monthly usage reports. Kahootz achieved this by identifying this model as an upside win-win for the company and the end user market and has seen consistent growth from it since its launch.  

Such identification of a customer pent demand makes an ideal driver to find a way to play. The public sector market being prime, where there are often demand spikes, with more licenses needed for short-term projects and dips at other times of the year. Add to this the additional pressures to be accountable for taxpayer spending and there is an identifiable push from this area of the market for more flexible and customer-beneficial pricing.

We will see more vendors taking such initiatives and the cloud market maturing and becoming more flexible as it progresses and this will lead to greater price transparency and options for the customer. We are also likely and will need to see a greater comparability of pricing between providers, as we are starting to see in other utility markets, which will enable clients to fairly compare the offerings not only from a price, but a quality of service aspect also.

Billing and pricing are key aspects that will lead to a cloud provider reflecting its true costs through its customer facing model and a lack of accuracy and diligence around these will likely lead to either an impact on the provider’s competitiveness through overcharging or on the nature of its survival through possible undercharging.

A more mature evolvement of the cloud billing models will not only benefit the customer in flexibility and price competitiveness, it will also allow providers to better understand and analyse usage patterns through data aggregation and real-time analysis, thus ensuring that these more flexible models impact their business in a positive way and not the in the perceived negative manner most resist it for today. Add into this mix the possibility of selling and billing your cloud offering through additional third-party channels to market; be they resellers, Xsps or technology partners and having systems that make this easy and accurate is even more essential.

What's for sure is that we are very likely to see a different landscape for cloud billing and pricing a decade from now (consider where we were a decade ago!) and it will be interesting to see which providers step up to the plate and are able to drive innovation in billing and not just the cloud service itself.

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Topics: cloud collaboration, user-based pricing