Pricing and Positioning Cloud Services: Best Practices Guide

Pricing and Positioning Cloud Services: Best Practices Guide

In this article, you will find information to help you understand how to position Cloud Computing Services in your solution stack and price them profitably for your prospects and clients to increase managed services sales.

Positioning Cloud Computing

Gartner Inc., one of the leading information technology research and advisory companies, describes Cloud Computing in their Hype Cycle Special Report of 2009 as:

“…the latest super-hyped concept in IT. Although cloud computing is about a very simple idea – consuming and/or delivering services from “the cloud”, there are many issues regarding types of cloud computing and scope of deployment that make the details not nearly so simple.”

As a result of the tremendous interest in the Cloud by end user customers and providers of Cloud Computing services, Gartner has included it in their Gartner Hype Cycle analysis.

Gartner Hype Cycle of Innovation

Screen Shot 2016-05-02 at 10.44.54 AM

Since 1995, Gartner has used Hype Cycles to characterize the over-enthusiasm, or “hype” and subsequent disappointment that typically happens with the introduction of new technologies. However; Hype Cycles also show how and when technologies move beyond the hype, offer practical benefits and become widely accepted.

In Gartner’s Hype Cycle Special Report for 2009, Cloud Computing was identified at the Peak of Inflated Expectations phase of the Hype Cycle, having surpassed the Innovation Trigger phase, the event that generates significant press and interest, building through the Positive Hype to reach its peak. According to Gartner’s Hype Cycle, the next phase that Cloud Computing will experience is the Trough of Disillusionment prior to attaining the Slope of Enlightenment and Plateau of Productivity, where the benefits of the technology become widely demonstrated and accepted. Cloud Computing’s position on Gartner’s Hype Cycle in 2009 forecast a two to five year timeline to reach mainstream adoption.

To put this in clearer perspective, Managed Services has been plotted in its current position on the Hype Cycle illustration – the Slope of Enlightenment, having already passed through the Trough of Disillusionment on the way to mainstream adoption on the Plateau of Productivity.

Based on their research, polling and surveys in 2008, Gartner made the following predictions regarding Cloud Computing:

  • By 2011, 90% of IT utility/infrastructure-as-a-service contracts will also include nontraditional service providers in the vendor evaluation phase
  • By 2011, early technology adopters will forgo capital expenditures and instead purchase 40% of their IT infrastructures as a service
  • By 2012, at least one-third of spending on business application software will be as a service subscription instead of as a product license
  • Cloud computing heralds an evolution of business that is no less influential than e-business

Gartner posits that Cloud computing will be a catalyst to a new way of consuming IT services by customers, as evidenced by their assertion

Cloud computing heralds an evolution of business that is no less influential than e-business.

These opinions by Gartner clearly position the adoption of Cloud Computing Solutions into an IT Solution or Managed Service Provider’s deliverables valuable to their business growth potential as well as their customers’ business needs.

What is Cloud Computing?

The National Institute of Standards and Technology; or NIST, an agency of the U.S. Department of Commerce founded in 1901 as the nation’s first federal physical science research laboratory; and whose mission is to promote U.S. innovation and industrial competitiveness by advancing measurement science, standards and technology, has developed the following working definition of Cloud Computing:

Cloud computing is a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction.

The 3 Cloud Computing Service Models

The 3 Service Models governing Cloud Computing deliverables consist of:

  1. Cloud Software as a Service, or SaaS – where the capability provided to the customer is to use the provider’s applications running on a cloud infrastructure. The applications; such as web-based email and office productivity applications, are accessible from various client devices through a thin client interface such as a web browser. The customer does not manage or control the underlying cloud infrastructure including network, servers, operating systems, storage, or even individual application capabilities, with the possible exception of limited customer-specific application configuration settings.
  2. Cloud Platform as a Service, or PaaS – where the capability provided to the customer is to deploy onto the cloud infrastructure customer-created or acquired applications created using programming languages and tools supported by the provider. The customer does not manage or control the underlying cloud infrastructure including network, servers, operating systems, or storage, but has control over the deployed applications and possibly application hosting environment configurations.
  3. Cloud Infrastructure as a Service, or IaaS – where the capability provided to the customer is to provision processing, storage, networks, and other fundamental computing resources where the customer is able to deploy and run arbitrary software, which can include operating systems and applications. The customer does not manage or control the underlying cloud infrastructure but has control over operating systems, storage, deployed applications, and possibly limited control of select networking components such as firewalls.

 

3 Service Models

3 cloud services

Cloud Service Examples

Cloud Software as a Service solutions deliver software over the Internet and eliminate the need for customers to install and run these applications on their local devices, simplifying maintenance and support. Examples of Cloud Software as a Service deliverables include hosted application software such as Word Processor, Spreadsheet and Email applications, as well as Social Networking and Photo and Video sharing solutions and hosted PSA and RMM solutions.

Cloud Platform as a Service deliverables include computing platforms and/or solution stacks, often consuming cloud infrastructures and sustaining cloud applications such as Windows Azure, Google AppEngine and Force.com. These types of deliverables facilitate the deployment of applications for customers and eliminate the need, cost and complexity of buying and managing underlying hardware and software layers.

Cloud Infrastructure as a Service delivers computing infrastructure; generally as virtualized environments, where all infrastructure such as servers, software, network equipment, data center space, storage and firewalls can be delivered to customers as a fully outsourced service. Solutions delivered by Rackspace, Amazon Web Services and GoGrid provide customers these types of services.

Examples of the 3 Cloud Services

examples of cloud services

Factors Affecting Cloud Services Pricing Strategies

There are several factors that can affect an IT solution or managed service provider’s pricing methodology for Cloud Computing Services, including their predominant business model, the services that comprise their Cloud offerings, their costs to deliver these services, their sales sophistication, and their efficiencies in delivering these services. The less efficient they are at delivering service, the higher their price points must be to maintain desired net profitability.

Cloud Services Pricing Pyramid

cloud services pyramid

Determining a Provider’s Predominant Business Model

The provider’s predominant business model may influence not only their deliverables and how successfully they are able to market and sell cloud services, but also their target markets, customers, vendors and profitability. A provider whose predominant business model is product-centric may be challenged when attempting to sell and deliver Cloud services, as the achievement of success in a more service-centric model requires unique skill sets centered on effective sales and long-term relationship-building and customer satisfaction techniques. As an example, it is logical to assume that a product-centric or time and materials based service provider would have a tougher time selling a managed services agreement and delivering services as efficiently, effectively and profitably as an MSP would.

Provider Predominant Business Models

 Provider Predominant Business Models

Determining and Developing a Cloud Services Offering

As each of the three Cloud Services models offer different solutions and appeal to different end customers and markets, the provider must determine their Cloud offerings. This will also depend heavily on the vendor and fulfillment partners the provider aligns with, and their capabilities, SLAs and price points. Each Cloud Services model; whether Software as a Service, Platform as a Service, or Infrastructure as a Service, has its own unique requirements and appeal from provider, end-customer, pricing, complexity and implementation and maintenance perspectives – and each delivers a different set of solutions.

The provider must evaluate each of these deliverables carefully and determine which of these, and in what priority, they will incorporate into their solution stack and begin offering to prospects and clients.

Cloud Services Models

Cloud Services Models

Determining True Costs of Service Delivery

Once the provider has determined their Cloud Services offerings, the first step in establishing profitable price points for each of their Cloud Services is to identify their cost of service delivery. In order to accomplish this, the provider must understand their hourly labor burden, their hourly overhead burden, the number of support hours it will require to support their Cloud Services customers and their costs for the Cloud Services they are reselling.

 

To calculate the labor burden for staff, the provider will divide all of their labor costs including those above and beyond gross compensation by 2080 work hours per year. To calculate overhead burden, the provider will total the yearly amount of all company overhead costs and divide that value by 2080 work hours per year as well. By adding these two values together, the provider can estimate their hourly cost of service delivery.

Once this has been determined, the provider will forecast the number of hours they predict it will take to support their Cloud Services customer and multiply that number by their hourly cost of service delivery. The final step for the provider to determine their total cost of service delivery is to add their costs for Cloud Services to the equation.

Determining Service Delivery Costs

 Determining Service Delivery Costs

In the example below, the provider has determined that their hourly cost of service delivery is $58.75. Further, they predict that it will take 4 hours per month to support a new prospect they are quoting a Software as a Service solution to. Due to the size of the user environment, their cost for the Software as a Service solution is $1,000.00, bringing their total internal cost for this solution to $1,235.00 per month.

 

Example Service Delivery Costs

Example Service Delivery Costs

Determine Retail Pricing

The final step left for the provider to determine a retail price for the Software as a Service solution for their prospect is to add their desired margin to their total cost of service delivery and present them with the final price for the solution. In the example below, the provider has added a 50% margin; or $617.50, to their total cost of service delivery for a final monthly retail price of $1,852.50 for their prospect.

Retail Pricing Example

retai pricing example


 

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Posted in: Cloud, Secrets to improving an I.T. Services Practice

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2 Comments

  1. Henry George May 6, 2016

    To deliver the best managed IT services and to increase the sales, it is necessary that there should be appropriate pricing that could equally benefit the prospective client and the company in terms of profit.

    • Erick Simpson August 26, 2016

      Agreed, Henry. Without a reasonable profit margin, long-term company growth is stymied.