A thoughtful pricing strategy goes a long way!

In my previous post, I tried to explain in brief the various steps that makes (or ought to make) up a general business accounting workflow. The process described in that post was adapted for the cloud service business context. Staying with the same theme, in this post I will try to show some light on the next logical step in the service monetization process.

The holy grail – the optimal pricing strategy

It is very important to have the correct pricing strategy in place. In an arena which is getting increasingly crowded, it is very important to stand out from the rest. You can either create a cloud service offering which is truly outstanding in nature, but in this era of fast technology changes and cutthroat competition, very soon you will find your innovative space being encroached by copycats and other competitors. You will have to keep on innovating, and in step – you must also differentiate your service in terms of an attractive pricing for end users. This does not necessarily imply offering lower prices, but having a smarter pricing model in place for the full spectrum of consumers you cater to (enterprises, individuals, public organizations, governments, not-for-profit groups, etc.). The design of your optimal pricing strategy will be very much service model dependent, so I will not try to prophesize a universal pricing strategy. If I dare say that I have a universal strategy in place – I would be lying. Therefore in this post I will cover the various pricing strategies to help you design a custom strategy most suitable for your cloud service offerings.

Types of pricing strategies

A carefully thought out pricing strategy would help a provider differentiate themselves from their competitors. One must conduct periodic reviews of their pricing model to take into account the ever changing business environment and changing customer expectations. With that in mind I will list the different strategies that you could adopt in your financial processes.

  • Time based pricing – you charge your consumers based on how long they have been using your services
  • Volume based pricing – you charge your consumers based on the volume of the metric that has been consumed (for ex. amount of bytes sent/received over the network)
  • Quality of Service (QoS) based pricing – if you offer differentiated services to your end users, then you could have differentiated pricing based on the different QoS offered
  • Flat rate pricing – you offer your services at a fixed rate for a fixed duration of time regardless of the volume of consumption.
  • Paris-metro pricing – in this pricing strategy you offer two or more different services offering the exact same service configuration and exact same QoS guarantees but with different pricing levels. But you reserve dedicated resources for the two offerings. The idea behind the strategy is that the higher priced service will be used less and therefore whoever is using the higher priced service will have a better experience due to low load.
  • Priority pricing – in this you charge differently depending on the levels of priority assigned to end-users’ tasks. Normally a higher priority request will get charged at an elevated rate.
  • Smart market pricing – in this model you let the market demand and supply decide the prices. In other words – your services will be priced on auctioning. This model is similar to Amazon spot pricing.
  • Edge pricing – the service pricing depends on the distance of the user from the service.
  • Responsive pricing – in this model, the pricing is activated only when there is congestion in the system.
  • Proportional fairness pricing – in this model the service prices are set keeping in mind the users’ willingness to pay and costs involved in service optimization.
  • Cumulus pricing – in this model, the user agrees to pay a flat rate for service consumption upto a certain limit, over which an added charge is levied on the extra consumption. In some sense it is similar to a dynamic pricing using a credit point system.
  • Session oriented pricing – the price is determined based on the nature of the task being conducted in a particular session.
  • One-off pricing – in this model, you charge a small amount for each session, for example – this could include the cost to perform inter-domain network orchestration for each service instantiation/setup.
  • Time of day based pricing – in this model, you set a different price for your service depending on different hours the service is being consumed (for example – daytime vs. nighttime rates charged by various utility companies around the world).

Of course, there is no one correct model. You should feel free to devise your own pricing strategy using any one or even a combination of several models described above. Since pricing is an important piece in the overall puzzle, this decision is not to be made hastingly. Let me also list the various variations in the pricing strategies that I have already listed above. Many of these are self-explanatory so I will simply list those.

  • Free of charge model
  • Periodical fees model
  • Discounts
  • Pre-paid pricing model – in fact implementing a pre-paid pricing scheme for a cloud services can prove a bit challenging (more on that will be covered in a future blog post).
  • Post-paid pricing model
  • Online accounting – in this model, you do customer accounting in a real-time basis, this could be beneficial in the sense that as a provider, you have a real time view of your resources utilization pattern and you can react to demand variations quickly.
  • Offline accounting – You store your consumers usage metrics and process them periodically at a later time. This style of operation is simpler but you lose the ability to view your users’ real time consumption behavior.
  • Static pricing – in this model, you fix the pricing function (refer to my previous blog) for the computation of charge records.
  • Dynamic pricing – as the name suggest, the pricing function is not static but changes depending on the operating environment trigger conditions and is more suitable to react to congestion in your system as the prices of your service will adjust accordingly.

So where do we go from here? Now that you are aware of the basic accounting process and various pricing strategies / models, hopefully you are more equipped now to differentiate your cloud services from your competition. Of course – you must keep yourself aware of the market situations and your consumers’ expectations. And as a general rule – never stop innovating!

So moving ahead I will try to put together a general architecture that will throw some light on how to provision a system to bill your end users and have a cash-inflow to support your business. Until then – ciao!