The Impact of Cloud Service Price Cuts on Procurement Strategy

As cloud computing has become the mainstream, there have been multiple price cuts in the market. Such price cuts generally come from a single cloud service provider. Price competition and increased economic scale are expected to make cloud services cheaper, but the confusing rate of price cuts also suggests that more work is needed.

Understanding the factors behind price cuts can help cloud buyers obtain ROI from their cloud, both now and in the future.

Providers may cut prices due to competition, but there is one thing that does not affect profits. In mature markets like cloud computing, most of the providers’ price cuts are to increase market size (TAM). Lowering cloud prices and cutting costs also makes this transaction easier to negotiate.

In a falling price market, customers must consider price protection in their service contracts. Make sure your service provider can adjust the contract if there is a price cut so that you are not trapped by higher prices. This adjustment is a common practice among large cloud service providers, so you may need to pay close attention to prices and find new ways to benefit.

Cloud buyers should also prepare project demonstrations so that they can upgrade their projects and reflect the changed prices. Surprisingly, a large number of companies said that when service provider prices change, they do not review cloud project considerations; many do not even monitor provider price changes.

If the establishment of a cloud project is stopped because it does not meet the company’s ROI target, the project materials should be added to the watch list and checked every time the manufacturer changes the price.

From capital expenditure to operating cost

Because providers want to increase TAM through price cuts, purchasers may overlook the potential benefits beyond the pure cost savings of cloud projects. At present, successful cloud projects may rarely run low-usage applications on dedicated servers, and IT application technical support for small and medium enterprises is limited.

Shifting the value chain to mainstream IT resources means going beyond the value proposition of traditional server costs and shifting from capital expenditures to operating costs.

Applied capital expenditures include hardware management; however, companies say that software operating costs are actually three to five times higher than hardware costs. Enterprises pay higher than usual support costs and find it easier to adjust in cloud computing, on the condition that their cloud services actually affect operating costs.

Infrastructure as a Service (IaaS) replaces servers with virtual servers, but still requires users to maintain software images stored in the cloud. Therefore, IaaS only replaces the hardware part of the capital support.

On the contrary, the adoption of platform as a service (PaaS) or software as a service (SaaS) may enhance the enterprise’s reason for cloud use. Because these platforms transfer system software (PaaS) or all software (SaaS) to the cloud, software operating costs are significantly reduced. This reduction is also the difference between cloud projects, making it easier for business or directly not approved, because it does not show that cloud projects provide sufficient benefits.

Cloud data storage options affect the bottom line of choice

When cloud price cuts make new applications a candidate for the cloud, it is important to carefully review cloud data storage and access costs. Sometimes the price reduction of highly-promotional computing instances is not consistent in data storage and access costs, limiting the impact of changes in shipping prices on overall service prices.

Users who regularly access the cloud, due to the low price, may find that the data cost is too high during the operation transfer from the experimental stage to the production stage. Sometimes cloud price changes will allow users to deploy more reliable and predictable forms of cloud services, including dedicated instances and geographic diversity.

It is valuable to review the cloud project proposal again. If the project is not suitable for the cloud due to current costs, higher performance and higher availability are required.

The cloud price model continues to evolve

Most users want to know how long these cloud price cuts will last. When some companies are doing five-year total cost estimation, they actually consider that cloud prices will drop by 15% a year. This may be too optimistic, especially as the increase in cloud customers begins to transfer more mainstream applications to the cloud.

In any case, the scale of the cloud computing economy will not grow linearly, and may decelerate. Because the current price decline will not last forever. The current trend is towards extremely low use of cloud applications, allowing operators to pack more things into a single cloud server. Professionalism means that as the project matures, it has to bear more.

Additional price drops may occur. Cloud computing costs are falling faster than cloud data costs; data prices may be the next goal of cloud operators trying to balance prices.

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Cloud service providers may introduce specific data services aimed at backing up and archiving, limiting frequent access, but offering more attractive prices. This price change will selectively affect cloud services, requiring more analysis, but may provide special benefits to those in need.

Price models are constantly evolving, and careful attention to recent and long-term transactions is important to follow trends. We also need to know the importance of industry alliances for the price reduction of cloud services. Enterprise IT needs to carefully monitor the ROI of cloud applications. This topic centered on The Impact of Cloud Service Price Cuts on Procurement Strategy.

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