CCS336-CLOUD SERVICE MANAGEMENT UNIT-IV

UNIT IV CLOUD SERVICE ECONOMICS

Pricing models for Cloud Services, Freemium, Pay per Reservation, Pay per User, Subscription
based Charging, Procurement of Cloud-based Services, Capex vs Opex Shift, Cloud service
Charging, Cloud Cost Models.

INTRODUCTION TO CLOUD SERVICE ECONOMICS

For business leaders, cloud migration may seem like the obvious IT choice in today’s data-
centric world. However, it doesn’t come with a simple one-size-fits-all strategy. The benefits
of the cloud compared with on-premises data centers vary from organization to organization.
Thus, when deciding to migrate to the cloud, businesses must consider a complex range of
practical and technical variables, and determining the long-term organizational impact requires
thoughtful analysis and foresight.

Cloud economics studies the financial impact of cloud computing, including elements such as
legacy hardware investments, monthly cloud service budgeting, and projected savings due to
better collaboration and technical innovations, to help an organization better assess its situation.
While nearly every organization can benefit from cloud computing, individual circumstances
dictate the how and why of getting there, making cloud economics a crucial step in the decision-
making process.

What Is Cloud Economics?

Cloud economics is the process of examining the financial and functional impact of cloud
computing on an organization. Leaders assess the critical elements involved in a potential cloud
migration. A cloud economics analysis weighs financial factors such as return on investment
(ROI), legacy hardware investment, and the total cost of ownership (TCO) for the cloud versus
on-premises data centers.

In addition to expected financial and technology considerations, a cloud economics analysis

should factor in the following cultural elements:

 Existing biases: Human nature makes us all prone to bias. Whether it’s staff locked into
legacy applications or simple resistance to new technologies, organizations must practice
self-awareness to overcome these biases for an objective cloud economics evaluation.
 Risk/reward threshold: Each organization’s comfort level with risk varies and depends on
criteria such as culture, budget, and technical expertise. Knowing an organization's standard
risk/reward approach—and when it can be adjusted—builds tolerances and boundaries for
cloud economics calculations.
 Current processes: Will a shift to cloud computing impact processes that drive core
business? If so, will the change require new training and skills? And will the involved teams
have the bandwidth to absorb such a change? The answers will affect the length and scope
of any cloud migration plan.

Key Takeaways
 Cloud economics is the study of the cost, resource usage, and business impact of a cloud IT
platform for an organization.
 A cloud economics analysis examines whether the benefits of a cloud platform outweigh
the cost and hassle of migration, in both the short and long term.

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 A sound business case for cloud includes elements such as upfront costs, switching from
CapEx to OpEx, effects on governance and security, and economic benefits of improved
processes.

Cloud Economics Explained

When considering cloud computing, organizations must understand that the scope of analysis
goes beyond hardware investments or monthly fees. Cloud migration can completely change
operations and development, depending on functional, data, and budgetary realities. In some
cases, organizations may have a simpler IT setup, and cloud migration may focus on improving
reliability and availability, with other features making less of an impact.
A common cloud economics approach involves breaking the analysis down across the
following four pillars:

 Total cost of ownership: A data center TCO analysis includes infrastructure costs, such as
the purchase or lease of the physical building, power and cooling systems, and networking.
Additionally, there are costs associated with hardware and software; personnel, including
salaries and benefits for IT staff; maintenance and support, including software updates; and
energy given that data centers require a substantial amount of power to operate.
In a cloud model, the TCO shifts to monthly usage costs for compute and storage, and
outlines how a shift in staffing needs will affect payroll. A cloud economics analysis breaks
these details down, providing cost/benefit insights across the organization.

 Efficiency improvements: Cloud platforms provide organizational benefits, including

improved collaboration and stronger DevOps support. Efficiency improvements can vary in
size and scope; some examples include faster data sharing between sales and marketing
teams, new IT innovations after freeing staff from data center responsibilities, and automatic
data integration into applications such as self-service analytics.
 Operational resilience: Local data centers face a constant risk of real-world issues
affecting availability. Natural disasters, power outages, and even local politics regarding
infrastructure can all cause unexpected downtime for on-premises equipment. Cloud
providers build uptime guarantees into service level agreements and design their business
models around redundancy, giving customers greater resilience.
 Operational agility: Many different factors can change the volume of network traffic,
including app updates and remote access. To absorb these spikes, on-premises data centers
need the physical resources to handle peak loads. In a cloud environment, scalability
becomes as simple as upgrading to a higher service tier. This creates organizational agility,
whether spikes are temporary, such as with holiday sales, or the start of significant and
lasting growth.

Why Is Cloud Economics Important?

Cloud economics is important because a cloud migration affects both tangible budgets and
theoretical shifts in operations and IT. No one-size-fits-all strategy applies; each organization
has different internal and customer demands and unique network and hardware configurations.
In addition, some organizations may still have networks built for business circa 2000, with
connectivity limited to email and uploaded files.

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For IT departments, cloud economics provides a deeper understanding of what organizations

must prepare for in both the short and long term. A cloud economics analysis should answer
the following questions:

 What do internal operations teams need?

 What do customers need?
 Do the company’s products or services require IT support for core functionality?
 What cloud-based tools do employees use?
 What compliance and regulatory factors apply?
Consider these two examples. In each, the organization must weigh different variables to
properly gauge its cloud economics situation.

A small regional healthcare group: A healthcare network’s IT department must support

electronic health records, incoming data from Internet of Things (IoT) devices, telehealth
access, and general operations. Because of privacy concerns, certain governance and security
issues also apply. The network faces a generally steady rhythm of data queries and traffic but
must be prepared for emergency situations.
A software company launching an app version of a video game: Prior to the app’s launch,
the needs of development and operations teams drive internal IT. Tasks include facilitating
codebase collaboration and supporting remote contractors across the globe. However, the app
launch shifts focus. Now we need servers capable of managing expected user volumes—and if
the app becomes a viral overnight sensation, the infrastructure must be elastic enough to
withstand massive spikes in usage.
While both of these organizations can benefit from the cloud, their situations demand different
strategies and different implementation plans. Without proper consideration of cloud
economics, organizations waste resources, waste money, or remain woefully unprepared. In
some cases, perhaps all of the above.

PRICING MODELS FOR CLOUD SERVICES

Cost considerations and pricing models associated with cloud services can be complex and
depend on various factors, including the specific cloud service provider, the type of services
used, resource usage, and additional features. Here are key considerations and common pricing
models in the context of cloud services:

Cost Considerations:

1. Resource Usage: The primary factor influencing costs is the amount of computing
resources used, such as virtual machines, storage, and data transfer. Providers often
charge based on the number of hours a resource is used or the amount of data
transferred.
2. Service Type: Different types of cloud services (e.g., Infrastructure as a Service -
IaaS, Platform as a Service - PaaS, Software as a Service - SaaS) have varying cost
structures. IaaS may involve more granular control over resources but can also
require more management compared to PaaS or SaaS.
3. Storage Costs: Costs associated with storing data in the cloud can vary based on the
amount of data stored, the type of storage (e.g., standard, archival), and redundancy
options (e.g., standard vs. redundant storage).

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4. Data Transfer Costs: Transfer costs are incurred when data is moved between
different regions or between the cloud provider and the internet. Understanding data
transfer pricing is crucial, especially for applications with high data transfer needs.
5. Performance and Scaling: Opting for higher performance instances or auto-scaling
features can impact costs. It's essential to balance performance requirements with
cost considerations.
6. Reserved vs. On-Demand Instances: Cloud providers offer various pricing options,
including on-demand instances and reserved instances. Reserved instances often
provide cost savings for committed usage over a specified term.
7. Licensing Costs: Some cloud services may include licensing costs for specific
software or operating systems. Understanding licensing terms is important for
accurate cost estimation.
8. Add-On Services: Cloud providers offer a range of additional services (e.g.,
databases, machine learning, monitoring). Each service may have its own pricing
model, so costs can accumulate based on usage.
9. Compliance and Security: Meeting certain compliance standards or implementing
additional security features may come with additional costs. It's crucial to understand
the security and compliance requirements of your application.
Common Pricing Models:

1. Pay-as-You-Go (PAYG): Users pay for the computing resources they consume on
an hourly or per-minute basis. This model offers flexibility and is suitable for
variable workloads.
2. Reserved Instances: Users commit to a one- or three-year term, receiving a discount
in exchange for the commitment. This is suitable for predictable workloads with
steady resource requirements.
3. Spot Instances: Users bid for unused compute capacity, and the price fluctuates
based on supply and demand. Spot instances offer potential cost savings for flexible
and non-critical workloads.
4. Free Tier: Cloud providers often offer a free tier with limited resources for a
specified duration. This allows users to explore and experiment with cloud services
at no cost.
5. Data Transfer Out and Ingress Costs: While ingress (data transfer into the cloud)
is often free, egress (data transfer out of the cloud) can incur costs. Pricing models
may vary based on the destination of the data transfer.
6. Per-User or Per-Transaction Pricing (SaaS): Software as a Service (SaaS)
providers often charge on a per-user basis or based on the number of transactions.
This model is common for applications like CRM or collaboration tools.
7. Resource-Based Pricing (PaaS): Platform as a Service (PaaS) offerings may have
resource-based pricing models, where users pay for the resources (e.g., databases,
messaging) they consume.
8. Event-Driven Pricing: Some cloud services, especially in serverless computing, are
priced based on the number of events or function invocations. Users pay for the
compute resources consumed during execution.
Understanding the cost considerations and selecting the appropriate pricing model for your
specific use case is crucial for optimizing cloud expenses. Regular monitoring and optimization
of resources can further help manage costs efficiently. Always check the pricing details and
documentation provided by the specific cloud service provider for for accurate and up-to-date
information.

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FREEMIUM

What Is Freemium?

A combination of the words "free" and "premium," freemium is a type of business model that
offers basic features of a product or service to users at no cost and charges a premium for
supplemental or advanced features. A company using a freemium model provides basic
services on a complimentary basis, often in a "free trial" or limited version for the user, while
also offering more advanced services or additional features at a premium.

Key takeaways

 Freemium is a business model in which a company offers basic or limited features to

users at no cost and then charges a premium for supplemental or advanced features.
 The freemium business model dates back to the 1980s, though the term was coined in
2006.
 Freemium models are especially popular among software applications and internet-
based businesses.
 This type of business model has the advantage of acquiring a large set of initial users,
especially when there's no cost associated with trying out an app or a service.
 Ultimately, for the freemium model to work, companies must ensure their premium
users can access more upgraded features, such as increased storage or customizations,
and additional customer service.

Understanding Freemium

Under a freemium model, a business gives away services at no cost to the consumer as a way
to establish the foundation for future transactions. By offering basic-level services for free,
companies build relationships with customers, eventually offering them advanced services,
add-ons, enhanced storage or usage limits, or an ad-free user experience for an extra cost.

The freemium model tends to work well for internet-based businesses with small
customer acquisition costs, but high lifetime value. It allows users to utilize basic features of
a software, game, or service for free, then charges for "upgrades" to the basic package. It is a
popular tactic for companies just starting out as they try to lure users to their software or
service.

Since the 1980s, freemium has been common practice with many computer software
companies. They offer basic programs that are free for consumers to try but have limited
capabilities; to get the full package, you have to upgrade and pay a charge. It is a popular
model for gaming companies as well. All people are welcome to play the game for free, but
special features and more advanced levels are only unlocked when the user pays for them.

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Freemium games and services can catch users off guard, as they may not be aware of how
much they (or their kids) are spending on the game since payments are made in small
increments.

Advantages and Disadvantages of Freemium

Freemium business models are popular and have the advantage of acquiring a large set of
initial users under a pressure-free trial, especially when there's no cost associated with trying
out an app or a service. Most people are willing to take a new app or service for a spin, giving
the company an easy way to acquire potential users and study their usage behavior. In many
cases, companies still benefit from their free users: though these users may not be explicitly
purchasing upgrades or items, the company can collect their user information and data, show
them ads to make revenue, and boost their own business numbers to continue to enhance the
application.

Especially for startups or companies that are trying to build a following for their product, the
freemium model brings a large amount of brand awareness while not having to provide a lot
of customer support.

On the flipside, some of the disadvantages of the freemium model are that free users never
convert to paid users. Ultimately, though some companies are perfectly happy with their free
users (and have accounted for these free users to make up a majority of their forecasted
earnings through their ad consumption or time spent on the app), they may offer too many
features on the free version that prevents users from ever upgrading into the premium version.

In addition, users may eventually get tired of a free version as it doesn't offer additional bells
and whistles but encounter other barriers or an unwillingness to upgrade to the premium
version.

Pros

 Companies can easily acquire potential users and collect their user information and
data
 They can make revenue on ads and boost their own business numbers to enhance the
application
 For startups, it provides a large amount of brand awareness without requiring a lot of
customer support.

Cons

 Free users never convert to paid users

 Too many features on the free version may prevent users from upgrading to a premium
version
 Users may get tired of a free version that doesn't offer additional bells and whistles

How to Convert a Free User to a Paid User

Converting a free user to a paid one is at the crux of many businesses' dilemmas. Especially
when a business' longevity is hinging on converting users, there can be additional pressure to
"upsell" their free users and make a larger margin of profit off them. Ultimately, for the

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freemium model to work and move people along to more expensive plans, companies must do
a mix of the following:

 Limit the features offered to free users, so that they will be enticed to upgrade for a
better experience.
 As free users increasingly use the product or service, offer increased storage, more
flexibility or time allowed on the app, and customizations.
 Offer additional personalized or customer service associated with an account.

Examples of Freemium

Spotify is one of the best-known companies with a highly successful freemium model; the
online music streaming service boasts an impressive 381 million users, and about 172 million
of those users are paid subscribers.

While users of the free version of Spotify have the ability to access all the same music as
premium users, they have to listen to ads and have a limited number of "skips" on songs they
want, among other drawbacks. For some, these limitations don't pose a challenge. But for
music aficionados who want more control and higher audio quality, paying for the premium
version is well worth the price.
Another example of a company that uses the freemium business model is Skype, the firm that
allows you to make video or voice calls over the internet. There's no cost to set up a Skype
account, the software can be downloaded for free, and there's no charge for their basic
service—calling from a computer (or a cell phone or tablet) to another computer. But for more
advanced services, such as placing a call to a landline or a mobile phone, you do have to pay,
albeit a small amount compared to conventional phone company charges.
A third employer of the freemium model—one of the earliest to do so—is King, the developer
of the highly popular internet game Candy Crush Saga. The addictive activity, available on
the king.com site, on Facebook, and on apps, is free to play. It allows users an allotted number
of lives within a certain timeframe, but charges for extra lives if someone wants to play more
during that window. Users also can pay for "boosters" or extra moves to help win the levels
and advance through the game more easily.

Is a Free Trial a Freemium?

Free trials and freemiums are slightly different; free trials are typically time-bound and only
allow a user to "test out" a few parts of a product or service. Meanwhile, freemium models
allow their free users to access the full application indefinitely.

Do Freemiums Increase the Number of Customers?

Freemium models lower new users' barriers to entry, increasing a business' number of total
customers by allowing some to test out a limited version of the product without financial
commitment.

Which Companies Use Freemium?

Many companies use freemium models, including Spotify, Dropbox, Hinge, Slack, and Asana.

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Can Freemium Lead to a Loss of Income?

Theoretically, businesses with freemium models can lose money if their conversion rate to
premium users is too low.

Conclusion

Freemium model is an acquisition strategy used to attract users to a product/service by providing basic
features for free, and advanced features for a premium.

PAY PER RESERVATION

INTRODUCTION

Cloud Computing from Amazon AWS, Microsoft Azure and Google GCP has an on-demand
billing model and usage costs. In a nutshell, it means paying only for what you consume.

A practical example would be a server turned on only during business hours. Instead of paying
a fixed fee for the entire month, you would only pay for the hours that the server was actually
connected. This means flexibility and savings. In addition to the processing cost involved with
the server in the air, costs such as data transfer and data storage costs must be taken into
account.

AWS, Microsoft Azure, and Google Cloud Platform offer several unique cloud services—each
with different commitment and discounting options. With so many choices, it’s difficult to
know what options are best for your business. To break it down, we’ve compared cloud
discounts, commitments, and reservations between the three primary cloud providers.

Leading public cloud providers offer several unique cloud services—each with different
commitment and discounting options. With so many choices, it’s difficult to know what options
are best for your business. To break it down, we’ve compared cloud discounts, commitments,
and reservations between the three primary cloud providers—Azure, GCP, and AWS.

WHAT IS A RESERVATION?

A Reservation, Savings Plan, or Committed Use Discount is a resource commitment with a

fixed term in exchange for discounted pricing. Purchasers benefit because they can pay less
money, and cloud providers benefit because they can plan usage capacity. However, savings
opportunities vary depending on the cloud provider.

Azure, Google Cloud, and AWS use different names for reservations. Azure Reservations can
apply to compute, storage, or app services. GCP Committed Use Discounts (CUDs) apply to
compute services or Cloud SQL, while flat-rate purchases apply to BigQuery (BigQuery
Reservations). Finally, AWS offers Reservations for EC2, RDS, ElastiCache, Elasticsearch,
Redshift, and DynamoDB, and Savings Plans for EC2, Fargate, and Lambda, where you’re
committing to a minimum dollar spend per hour. See our blog for an in-depth comparison of
AWS Reservations and Savings Plans.

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Fig: 1 Different names of cloud reservations

WHAT IS RESERVED CAPACITY?

Reserved capacity is a guarantee that you’ll be able to spin up your requested infrastructure in
a specific location in the unlikely event that there are capacity constraints. Depending on the
cloud provider, reserved capacity can be coupled or decoupled with reservations.

 Azure: Virtual Machine reservations are given prioritized compute capacity, whereas
the reservations for database services (e.g. Cosmos DB) are referred to as reserved
capacity. If you purchase an Azure Reservation, you’ll automatically be able to launch
your infrastructure with that specific configuration.
 GCP: Reserved capacity is decoupled from reservations. When you purchase
Committed Use Discounts, it’s not guaranteed you can launch an instance in the
specified region or configuration. If you’d like that guarantee, you’ll need to purchase
a zonal reservation. It’s important to note that zonal reservations don’t have a contract
term. You can purchase one in the morning and terminate it in the evening. This is an
opportunity to purchase reservations and reserved capacity separately to operate on an
as-needed basis.
 AWS: Some types of AWS Reservations come with capacity benefits (Zonal Reserved
Instances for example), but Savings Plans and Regional Reserved Instances don’t have
this benefit. AWS also offers the ability to purchase only the capacity guarantee—called
a Capacity Reservation. Just like Google’s zonal reservations, you can end them
whenever you like.

Given this overview, we’ll provide more detail into the different discount, commitment, and
reservation options for each cloud provider.

Discounts, commitments, and reservations with Azure

When you purchase Azure Reservations, you’ll receive a discounted price in return for
committing to pay for those resources for one to three years. You can purchase more than 15
different services with Azure reservations. Among CloudHealth customers, the most common
purchases are Reserved Virtual Machine Instances.

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Fig: 2 Reservable Google Cloud Platform services

With GCP Committed Use Discounts (CUDs), when you purchase compute resources (vCPUs,
memory, GPUs, and local SSDs), you receive a discounted price in return for committing to
pay for those resources for one to three years.

Google offers two different models for CUDs based on scope:

 Billing Account Scope: Applies to usage anywhere in the Billing Account, regardless
of which project purchased it.
 Project Scope: Applies only to usage within the project that purchased it.
Once committed to a contract with GCP, you’re billed each month for the duration of the term
whether you use the services or not. When you make a commitment to an instance family,
you’re committed to that instance family for the life of the commitment. Unlike Azure, you
can’t make changes or cancellations.

Depending on the service, GCP offers different payment plan opportunities. With compute,
there’s only No Upfront—you can’t purchase Partial or All Upfront CUDs.
With BigQuery Reservations, it’s flat-rate pricing based on usage, and with CloudSQL, it’s an
hourly commitment model, which is a recent update since June 2020 and is similar to AWS’
Savings Plan model.

Discounts, commitments, and reservations with AWS

AWS Reserved Instances (RIs) provide savings on compute costs for either one or three-year
commitments. Concerning scope, reservations can be broken down by Region or Availability
Zone:

 Regional Scope: Discounts apply to instance usage in any Availability Zone in the
specified region, and to any instance within the same family, regardless of size.
 Availability Zone (AZ) Scope: Discounts only apply to usage within a specific
Availability Zone, and there’s no flexibility on the instance size or type.
As we mentioned above, capacity reservations are coupled with AZ-scoped RIs but not with
regionally scoped RIs.

Reserved Instances can be either Standard or Convertible. Standard RIs can be resold on
the AWS RI Marketplace, but they can’t be exchanged with a different instance family type.
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Convertible RIs cannot be resold, but they can be exchanged across instance family, instance
type, platform, scope, or tenancy.

AWS supports All Upfront, Partial, and No Upfront reservation payments. Depending on the
plan and how much you pay, you receive different discounts. Generally, the more you pay
upfront, the more significant discount you’ll receive.

PAY PER USER

Introduction

Crafting the perfect SaaS pricing strategy can be a daunting task for any digital enterprise. The
balance between fair pricing and appealing payment options is often a difficult one to strike.
The question that looms large is - should your business embrace the Pay-Per-Use (PPU) model,
or should you stick to traditional subscription-based options? The frequency of payment,
whether monthly, quarterly, or yearly, and the number of plans your SaaS should offer also add
to the complexity of this decision.

We're in an era where digitization is racing ahead at warp speed, leading to significant shifts in
customer behavior. Consequently, numerous businesses are venturing into novel, consumer-
centric business models like 'pay per usage.' This model has a unique appeal, especially when
you want to introduce flexibility and user convenience into your pricing structure.

So, what exactly is this PPU model, and how does it work? More importantly, what benefits
does it offer, and how can it potentially catapult your business to the next level? These are
crucial questions that demand detailed exploration. In the upcoming sections, we’ll delve
deeper into the mechanics of pay-per-usage, particularly its implementation in cloud
computing environments. By understanding these elements, you'll be equipped to make an
informed decision about whether this model aligns with your business goals and customer
needs.

Pay-Per-Use: A Dynamic Pricing Model

When it comes to SaaS products, one question tops the list for customers: "How much does it
cost?" That's why the choice of a pricing model becomes as important as developing standout
features or crafting a compelling sales strategy. Among several pricing models, Pay-Per-Use
(PPU) is one that's gaining traction due to its adaptability and customer-friendly nature.

Pay-Per-Use, as the name suggests, is a payment model where customers pay according to their
usage of a product rather than buying it outright. In essence, the more they use, the more they
pay, and conversely, the less they use, the less they pay. For instance, if you consider a cloud
storage service provider, the charges will be based on the amount of storage utilized. Similarly,
many phone carriers adopt a PPU model, billing customers based on the number of minutes
used.

This pricing model is frequently seen among infrastructure and platform-related software
companies, such as Amazon Web Services, where charges are based on metrics like the number
of API requests, processed transactions, or gigabytes of data used.

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However, the PPU model isn't limited to such scenarios. Increasingly, SaaS companies across
diverse sectors are finding innovative ways to implement it. Take, for example, social media
tools that charge users for each scheduled post or accounting tools that bill per invoice.

In the Pay-Per-Use model, the company retains ownership and responsibility for the product
or service. The customer, in turn, pays a fee for usage on demand.

Why do customers prefer PPU?

Many customers prefer this model due to the inherent benefits it offers. Primarily, it aligns with
the principle of paying only for the services they require and actually uses. Furthermore, in
many cases, customers end up receiving superior service since the provider has a vested interest
in offering a product that stands the test of time.

The PPU model also offers straightforward revenue calculation, and customers appreciate the
predictability of being charged based on usage.

Pay-Per-Use Model: Exploring the Business Growth Opportunities

Usage-based pricing models, such as pay-per-use, certainly have their merits. Many customers
find them appealing due to their affordability and flexibility, especially when they only require
occasional software usage throughout the month. Let's explore the benefits of the PPU model:

Lure in customers with lower upfront costs.

A common barrier to customer acquisition is the intimidation of a commitment to a subscription

plan. The PPU model acts as a bridge, attracting customers with its low, upfront cost. It's
simple; customers only pay for what they use. For instance, if your business offers an email
platform, customers may pay for sending 5,000 emails in one month and pay nothing the next
month when they send none. This flexibility and affordability cater to businesses that require
irregular usage, enhancing your customer base.

Maximize earnings by charging based on consumption.

In a PPU model, customers who consume more pay more. Unlike the flat-rate or even tiered
system, the PPU model allows for a flexible pricing approach that scales with consumption.
This fairness in pricing ensures that high-consumption customers contribute equitably to your
revenue.

Accelerate your company's revenue growth.

Despite the seeming inconsistency of the PPU model, SaaS companies can actually witness
faster growth. PPU's strength lies in its real-time scalability. When customer usage increases,
your earnings amplify instantly. There's no need to reassess your monthly rates and roll them
out gradually. The PPU model, thus, paves the way for rapid revenue growth.

Foster customer loyalty.

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The PPU model allows for a more service-focused relationship with customers rather than a
one-off purchase interaction. This fosters loyalty, and the added value of services such as
installation, support, and maintenance creates a stronger value proposition, making it less likely
for customers to switch to competitors.

Extract valuable customer insights.

The pay-per-use model offers significant advantages by providing companies with a clear
understanding of how customers engage with their product or service. This valuable insight
allows for improvements, personalized options, and the development of new offerings. SaaS
companies, in particular, can benefit from the accurate feedback it provides on their pricing
strategy.

Consider a scenario where your pricing page offers a diverse range of services across various
pricing tiers. However, you observe that only a few customers utilize a handful of these
services. Based on this behavior, several inferences can be made regarding your SaaS business:

 Pricing plans may be set too high: Value proposition may lack appeal: If customers
are not upgrading between tiers, it could indicate that the perceived value or benefits
offered in the higher-tier plans are not compelling enough. Evaluating and enhancing
the value proposition for each pricing tier can encourage users to consider upgrading.
 Preference for an A La Carte model: Some customers may prefer the flexibility of
staying at their current tier while selectively purchasing add-ons or additional services
that align with their specific needs. Offering an A La Carte model could cater to this
preference and potentially increase customer satisfaction.
 Varied buyer personas: The discrepancy in service usage implies that different buyer
personas exist within your customer base, each with unique preferences and priorities.
By identifying these personas, you can tailor your offerings and marketing strategies to
better cater to their specific needs.

What's in it for your customers?

 Fewer responsibilities
The PPU model transfers ownership risks and maintenance responsibilities to your business,
reducing the burden on customers.
 Lower costs, greater transparency
The PPU model makes costs more transparent and accessible. There's no large initial payment
required for access, just a flexible, easy-to-monitor monthly cost based on actual usage.
 Continual improvement of products and services
To succeed with PPU, companies must focus on customer loyalty. That means they're
continually refining their services and products based on customer data.
Is Pay-Per-Use in Cloud Computing the Right Choice for Your Business?

Navigating the landscape of business models can be daunting, yet having a clear understanding
of different pricing strategies, such as the Pay-Per-Use (PPU) model, can give your business a
competitive edge. Is PPU the right choice for your business? Let's evaluate this based on several
key considerations.

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The essential pillars for pay-per-use

Before venturing into the PPU model, your business needs three foundational elements in
place: hardware & software, services, and protection.

 Hardware & software: To effectively apply PPU, you need a robust pool of hardware
and software capable of generating all necessary data. Without this, the model is
unlikely to thrive.
 Services: Ensuring there's a network ready to deliver, maintain, and install the product
on demand for your customer is integral for success in a pay-per-usage strategy.
 Protection: Your customer's trust in you increases if they know they can count on you
during an emergency. A system to support your customers when they need you most
can solidify the success of your PPU model.

Understanding your business specifics

Implementing PPU is not a one-size-fits-all strategy. Consider the specifics of your business
by asking these questions:

 What is the cost incurred for each instance of usage in our business?
 How much usage volume is needed to reach the break-even point?
 What is the minimal offering that would sufficiently attract customer buy-in?
 Can the value proposition be easily implemented and tested?
 Does the pay-per-use offering effectively solve customer problems compared to
alternative models?

The answers to these questions will offer insights into how the PPU model can benefit your
business.

The role of buyer characters in pay-per-use

Particularly in Software as a Service (SaaS), clear buyer characters and understanding how
your target customers use your software are critical for success. This knowledge not only aids
in pricing your service effectively but also underscores how your product alleviates your
customer's pain points.

Pay-Per-Use particularly shines when you have diverse customer demographics. Super users
are willing to invest heavily in your product, while frugal newbies may prefer to dip their toes
in for a lower rate. Catering to these diverse needs can be a strategic move for your business to
thrive, and PPU offers this flexibility.

Conclusion

In essence, adopting a pay-per-use model in your business requires both a solid infrastructure
and a clear understanding of your target customers. Through careful assessment and strategy,
it can prove to be a lucrative move for many businesses, potentially including yours.

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SUBSCRIPTION BASED CHARGING

Introduction
The subscription-based pricing model is not just a trend or an industry standard. It’s one of the
most profitable pricing models for software companies.

A KeyBanc survey of 100 software companies shows a median gross profit margin of 80% on
subscription or SaaS revenue. In fact, only about 10% of respondents reported a profit margin
of 60% or lower on their subscription revenue.
The benefits of subscription pricing are clear, but it’s still challenging to narrow in on the right
price and billing model for your SaaS. Businesses need price points that correlate to the value
of their products, as well as pricing strategies that appeal to their customers.
While narrowing in on the right pricing, you need to think about your customer needs, the
competition, and your bottom line. Then, you need to identify benchmark metrics that help you
track the success of your subscription business.
With so many moving parts, it can be hard to know where to start.
To help you out, this guide looks at the strengths and challenges of subscription pricing. Then,
it outlines several different pricing models and provides tips on how to manage subscription-
based pricing as your company grows.

What is a subscription-based pricing model?

A subscription-based pricing model is when your clients pay a recurring fee to use a product
or service. This is typically invoiced as an annual or monthly fee.
This model is very popular with both SaaS and streaming service providers—think Spotify,
Netflix, and Quickbooks. However, businesses ranging from car washes to HVAC companies
to pest exterminators also use subscription pricing models to bring in extra revenue.
Subscription pricing typically leads to greater retention in your customer base, lending a degree
of predictability to your revenue stream. Because of this, the subscription based pricing strategy
has become popular in many different industries. But don’t let its growing popularity make you
think that subscription pricing is simple.
In fact, this pricing model can be very complex. You have to ensure that it works well with
your business model. You also have to consider software development, maintenance, and
customer acquisition costs, and the number of users you need to cover those costs. You then
have to make decisions about pricing tiers and which type of pricing model you want to use.
Then, of course, you have to consider subscription lengths, add-ons, and inclusions.

Benefits & challenges of subscription-based pricing

There are pros and cons to all different price strategies. Here are the main benefits and
challenges of a subscription-based business:

Benefits:

 A predictable recurring revenue stream.

 Potential low cost of entry for new customers.

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 Promotes customer retention and higher customer lifetime value.

 The pricing model can be easily modified as the product or company grows.

Challenges:

 Early-stage revenue uncertainty.

 Customers may be hesitant to sign up for a recurring fee.
 Risk of cancellations that increase your churn rate.
 The need to constantly provide more value.
As you can see, many of the pros and cons overlap, and they vary based on the decisions you
make. For instance, if you embrace freemium pricing options, you create a low cost of entry
which can help attract new customers. However, if you use a value based pricing model, some
potential customers may be doubtful to sign up.
Similarly, some subscriptions build customer loyalty in a way that reduces churn, while others
don’t meet customer expectations and have higher churn rates. But this also depends on your
buyer persona. For this reason, it’s important to remember that you shouldn’t limit yourself to
one pricing model. In some cases, you may use many models to enhance customer engagement
and cross-selling opportunities.

6 Subscription pricing models

To ensure that you select the best subscription pricing strategy for your business, you need to
look at all the pricing models. This overview will help you find the ideal subscription-based
pricing model for your software company.

1.Freemium
This pricing model uses a combination of free and premium offerings. Generally, the free
option is designed to hook users and showcase some of your product’s potential. When
subscribers need or want more, they can purchase individual add-ons or upsell services, or
upgrade to a premium subscription.
Offering something for free can be very useful from a marketing perspective. When a client
finds something free that they enjoy, they often post about it on social media or tell their
followers. This builds brand awareness in an inexpensive and convenient way. Some
companies even offer referral bonuses to subscribers who get others to use the product.
Freemium often tends to work better than a free trial period. Consumers are becoming
increasingly skeptical about free trial periods because they worry that they won't remember to
cancel or that the offer comes with strings attached.
If you opt for this model, you have to make careful decisions about which features are free vs.
paid. Your free offerings need to be compelling enough to hook new subscribers. At the same
time, you don't want to give anything too valuable away. If you give away too much for free,
it signals to your users that your SaaS isn’t worth the premium price you’ll eventually want
them to pay.
This pricing model is successful in a wide range of industries. For example, LinkedIn,
DropBox, Semrush, and countless other SaaS companies offer both a free version and multiple
premium options.

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2.Flat-rate pricing model

With flat rate pricing, you pay a set price for access to a product or service. Companies that
select this pricing model generally offer a single fixed price for unlimited use. They don't
usually have free options or different tiers, though they may incorporate free trials.
The main benefit of flat-rate pricing is its simplicity. Using a single price streamlines financial
projections and makes future price adjustments easy. It's also a breeze to advertise a single
upfront price point to your customers.
Flat rate pricing is not ideal for most SaaS businesses, but there are exceptions. Basecamp, for
instance, has had a lot of success with flat-rate subscriptions. The company has a per-user
monthly price and an unlimited-user monthly price. This model tends to work best for
companies that have a very specific product and a well-defined customer base.

3.Tiered pricing model

Businesses that offer several subscription options at different price points use tiered pricing.
The tiers may be based on volume of use, features, or even on how your customers perceive
your offerings.
This pricing model lets you appeal to the needs of a broad audience. When optimized, it lets
you target different market segments without risking revenue loss. However, that's also the
inherent challenge. You need to narrow in on prices and offerings that make sense for your
business and your audience.
The tiers should help you maximize the lifetime value of your customers (CLTV). If you have
too many tiers or options, your customers will end up confused or frustrated. Additionally, if
the tiers are too similar, there won’t be a compelling reason for someone to pay for a higher
tier.
The most popular tier-based pricing offers basic, standard, and premium. But this isn't the only
option. Ultimately, you need to shape tiers based on your customers’ needs and expectations.
This pricing model is ideal for SaaS companies that have defined levels of offerings.

4.Value-based pricing
With value-based pricing, pricing is based on the customers' perceived value of the product or
service. It is not based on the cost to produce the product or other quantitative metrics. Instead,
the pricing model reflects the customers’ appreciation for the product and how much they're
willing to pay.
Value-based pricing allows companies to maximize profit margins while providing as much
value as possible for their users. While setting your subscription rate, you should of course
consider costs and the profit margins you want your company to hit. However, the main
consideration is customer delight.
How does the product make their life easier? How does it make them happier? These variables
will guide you to the amount customers are willing to pay. You must understand your
customers’ motivations if you want to use this pricing model.

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Value-based pricing works well for companies that produce high-end offerings that command
a lot of prestige. For instance, companies in the art and fashion industry often use value-based
pricing, but this strategy can work extremely well for SaaS companies that serve a niche
customer based or offer better features than their competitors.

5.Per-user pricing
Per-user pricing is a fee based on the number of users. For instance, if a company wants 15
employees to use software that charges $10 per user, they must pay $150. If they only have one
employee using it, they would only need to pay $10.
At first glance, this is one of the most straightforward subscription pricing strategies, but it can
become complex. If you decide to take this route, you need to consider your customers’ needs
very carefully.
This option may not work well for software that is generally only used by one person at a time.
In this case, per-user pricing can also backfire because a team may just share login credentials.
Per-user pricing is most ideal for software that works best with multiple users. Still, it can be
used as a supplemental pricing strategy alongside others.

6.Usage-based pricing
The usage-based pricing model involves a subscription fee based on a subscriber’s
consumption levels. The more the subscriber uses, the more they pay. If they don't use the
software, they don't pay as much, and in some cases, they may not pay anything at all.
This is not a new pricing model. Arguably, it's one of the oldest subscription-based models. It
has been used by utility and communication companies for years. Water and electric companies
still use this model, while communication companies have moved away from it. For example,
decades ago, people had to pay for the time they spent on long-distance calls, but now most
phone companies have integrated long-distance calling into their base price.
The main disadvantage of this model is that customers aren't paying a set fee every month.
Instead, their prices fluctuate. This can complicate revenue recognition and financial
projections. However, this doesn’t mean that software companies should shy away from this
model.

According to Ray Rike, Some of the "fastest growing SaaS and cloud companies have used
[usage-based pricing]. The results have been impressive, including extremely high net dollar
retention (NDR) rates and increased enterprise value to revenue (EV:REV).
This pricing model works for many different SaaS companies, but it may be particularly useful
for software products that involve frequent API calls and data usage.
The best pricing model varies based on your product, business objectives, and target customer.
And once you’ve chosen a model, you need to track the right financial metrics and adjust as
needed.

How to choose a subscription-based pricing model for your business

When choosing between different pricing models, you need to consider internal and external
elements: Your costs, your competition, and what appeals to your customers, just to name a
few.

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To narrow in on the right pricing model, you should work through the following questions.

 What pricing model makes sense for your unique product?

 What does your current customer base want? What will appeal to new potential
customers? Are you marketing to individuals, small businesses, or other software
companies? What is their perception of your product?
 What are your competitors doing? Should you follow suit or is there a compelling
reason to break away from the pack?
 What value metrics do you want to use to measure your success? How do the metrics
you select influence the pricing model you choose?

Conclusion
Choosing a subscription pricing model is never a ‘set it and forget it’ task. It requires consistent
planning, testing, and monitoring to find one that works well for both you and your customers.
While pricing exercises become increasingly complex as your company scales, subscription
management software makes the process much easier.

PROCUREMENT OF CLOUD-BASED SERVICES

https://www.youtube.com/watch?v=1bMXjKd0f_I

Introduction
Digital transformation has already revolutionized the business world, and it's showing no signs
of slowing down. According to Techjury, 67% of enterprise infrastructure is cloud-based,
and 81% of all enterprises have a multi-cloud strategy already laid out.
The next discussion shows you how our business can benefit from using cloud
procurement software and what steps you need to take to implement the best strategies into
your procure-to-pay cycle.
What is Cloud-Based Procurement?
Since cloud procurement is based on cloud computing services, it's important to understand
how this technology works, its types, and its features.
So let's start with a quick definition of cloud computing.
In short, cloud computing allows accessing different IT resources via the Internet with pay-as-
you-use pricing, rather than downloading them to your computer’s hard drive.
These services include:

 Software;
 Analytics;
 Networking;
 Data storage;
 Servers and more.

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 Thus, the cloud provides the ability to store and access data via the Internet, while cloud
procurement systems automate such processes as data entry, cost
analysis, vendor selection, and project tracking.
All this functionality helps save costs, choose the best vendors, ensure compliance, appraise
supplier risk, and streamline procure-to-pay cycle.

Three Categories of Cloud Procurement

Cloud procurement can be built on different models that cloud service providers offer.
Let's take a look at them:

1.Software-as-a-Service (SaaS)
In short, SaaS allows using cloud procurement applications over the Internet, freeing you from
complex hardware and software management.
You don't need to install and maintain software, all you need is a stable Internet to access end-
user solutions.
SaaS providers handle program scaling, for example, by adding more database space or more
computing power as usage increases.
The provider also ensures data encryption, regular backups, updates, and patches.
Most out-of-the-box procurement systems are based on the SaaS model.
One such procurement software solution is Precoro, which helps companies automate the
purchasing process, get better insights, and focus on more critical tasks for their business.
With Precoro, you have all the necessary features for the procurement process to run smoothly:
All the PRs are in one place with clear statuses and request analytics;
Instant PO generation from request or from scratch and their automatic submission to
suppliers;

 Approval workflow with smart notifications for each approver in line.

 Real-time Reporting with customizable fields for custom reports.
 Integration with QuickBooks Online, Xero, NetSuite, etc.;
 Catalogs for quick and easy item selection.
 PO, Receipt, and Invoice 3-way match to prevent incorrect payments from happening.
 Budget Management dashboard with real-time insights and clear reports.
All these functionalities help the procurement process to be fast, accurate, and profitable for
the business. And here is how this process goes in cloud software:
1. After initiating the purchase, the software compares the requests with the company's
workflow rules.
2. The system then sends the application through the approval chain, notifying each
approver.
3. After approving the request, the system creates a corresponding PO.

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4. When an invoice arrives, the software matches it with the PO, receipt,
and contract terms.
The payment for a procurement solution is typically based on such factors as the number of
users, usage time, amount of data stored, and the number of transactions processed.
SaaS allows your organization to quickly get started with minimal start-up expenses.

2.Platform-as-a-Service (PaaS)
This model provides customers with a platform to develop, run, and manage applications
without creating and maintaining cloud systems. The PaaS provider hosts servers, storage,
networks, operating system software, development tools, and databases.
Typically, customers can pay a flat fee to provide a certain amount of services to a certain
number of users or choose a pay-as-you-go model. PaaS can be delivered through public,
private, and hybrid clouds to provide application hosting and Java development services.
So, this cloud model is for software developers that can create and adjust procurement software
to their liking. Unlike in SaaS, in PaaS you develop and update the procurement program and
manage databases by yourself.
This model is most popular in the following cases:

 If there are a large number of internal tools that need to be integrated with the
procurement process.
 A company has non-standard procurement processes and thus special needs that most
SaaS providers cannot meet.
 When a company has changing procurement flows that require different functionality
at different stages of development.

3.Infrastructure-as-a-Service (IaaS)
IaaS is a cloud computing service in which businesses rent servers for computing and cloud
storage. It provides memory, storage, networking, and related software, such as operating
systems and databases.
This solution gives the end user flexibility when it comes to hosting custom programs or
standard software, as well as providing a shared data center for storage. Thus, IaaS can be used
to deploy and run regular software and business applications, such as procurement software.
This model is most often used by companies that want to have full control over their
procurement platform, as well as growing organizations that are not yet sure about the
application and expect that it will develop over time.
Let’s recap. Think of the above-mentioned models as a pyramid:

 SaaS is at the top of the pyramid. It offers ready-to-use solutions for your procurement
needs. Most modern SaaS platforms are built on IaaS or PaaS platforms.
 The next component of the pyramid is PaaS. It's most often built on the IaaS platform
to reduce the need for system administration. This allows you to focus on developing
procurement applications instead of infrastructure management.

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 The base of the pyramid is IaaS. This model gives you maximum flexibility when it
comes to hosting custom procurement applications and providing a common center for
data storage.

Cloud Procurement Strategy

If you want the transition to cloud-based procurement to be smooth, it's essential to follow a
time-tested strategy.
The following tips will help you minimize mistakes, identify savings opportunities, eliminate
maverick spending, and enforce policies.

Fig :3 Cloud Procurement Strategy

Step 1. Determine Business Needs

To align your procurement strategy with your business goals and set priorities correctly, you
need to understand your organization's needs clearly.
The CIO and other decision-makers must involve key stakeholders in the process from the
outset so that they have a clear understanding of both the goals and the desired business
outcomes for their company.
Try to write down each potential business problem, goal, or scenario and the corresponding
specific steps to be taken in the chosen direction.
Step 2. Choose the Right Cloud Service

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Once you define your organizational needs, it's time to find a cloud solution that best meets
them. Suppose your company needs special functionality that you can't find in SaaS solutions,
but you don't want to mess with server building and database management.
In that case, the PaaS model is an excellent fit for you. On the other hand, if you have specific
security concerns that require a private cloud or isolated databases, or your company needs
higher customization and the ability to scale resources quickly and regularly, explore IaaS
options.
Regardless of which of these two service models you choose, before deciding on a vendor, pay
attention to the following:

 Check if the platform is easy to navigate and access.

 Read through the provider's SLAs to determine uptime guarantee and support.
 Check that your potential vendor has fault-tolerant techniques or disaster recovery to
ensure the constant availability of their services.
 Review the provider's performance, including their business history, customer
satisfaction, product reviews, and whether the vendor has a history of legal issues.
 Make sure that the provider caters to what you need, as some will focus on larger
corporations while others focus more on small and midsize businesses.
In case your company has standard procurement processes and you don't have time and
resources to build your own software, it's best to stick with SaaS.

Step 3. Must-Have Software Features

If you've decided that complex hardware and software management isn't for you, then let's see
what to look for when deciding on a SaaS platform. When choosing a cloud service provider,
give preference to those who offer a free trial.
The trial period will help you ensure that the cloud service meets your business requirements.
Here are some must-have features to look out for:

 Customer support.
 Budget management.
 Three-way matching.
 Seamless integrations.
 Spend insights and reports.
 Customized as per your needs.
 Vendor management capabilities.
 Simple and easy-to-use interface.
Keep in mind that the amount of functionality should correspond to the size of your business.
Tip: If you’re a small business, avoid procurement solutions with a lot of extra functionality.
This will save both money and time.
Step 4. Ensure Security
Governance in a cloud environment differs from the traditional one. Carefully read the user
agreement and use a cloud service that encrypts your files both in the cloud and on your
computer.

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Encryption ensures that third parties do not have access to your personal information. In order
to secure cloud hosting, the company providing service should be ICO- and SOC-certified.
Compliance with GDPR (General Data Protection Regulation) is also a decisive factor when
choosing a service provider.

Step 5. Be Flexible
One of the key benefits of cloud computing is its flexibility, and CIOs mustn't be burdened by
the procurement process that is inflexible and constrained.
Having the right business environment and the proper governance is undoubtedly important,
but at the same time, flexibility is needed for both current and future growth. Otherwise, the
benefits will be lost before the transformation begins.

The Advantages of Cloud-Based Procurement

With procurement in the cloud, businesses can handle requisitioning, sourcing, and purchasing
with ease.
Cloud solutions allow you to create purchase orders, ensure that prices and terms negotiated in
the contract are fulfilled, manage revisions to documents, and streamline the procurement
process.
In addition, automation leaves no room for error in critical tasks, such as purchase orders,
delivery schedules, and approved budgets.
The visibility and availability of spending analytics provided by procurement cloud software
help relieve the burden on the procurement team and have a clear vision of business
expenditure.
They’re also beneficial for all decision-makers in the company.
If you're still in doubt, let's take a closer look at the benefits that cloud services can offer:

1.Cost-Effectiveness
According to The Hackett Group, procurement automation reduces staff costs by as much as
21%. Cloud procurement systems provide quick access to spending history and help managers
make better decisions on purchases. They allow you to conduct cost analysis that helps identify
and eliminate maverick spending.
In addition, automation will help you reduce labor costs, as fewer people are involved in the
process.

2.Ease of Use
Cloud procurement solutions are easy to use and do not require long-term user training. As a
result, businesses can use cloud-based procurement software to meet evolving market demands
rapidly without the need for expensive upgrades.

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The ease of use eliminates maverick spending as the software entirely automates purchasing
from an authorized supplier. You can customize the platform to suit your needs and get support
from professionals on any issue related to the program.
Ease of use is also due to the fact that you no longer need to perform complex manual work.
The program facilitates everything from a purchase request to the collection of business
expenditure information.

3.Spend Visibility and Control

Cloud-based procurement software analyzes spend information and provides product-level
visibility throughout the organization.
This way, you have all the necessary control over the company's spending, which helps
determine saving opportunities, streamlines the supply chain, and maximizes the value of each
contract.

4.Seamless Integration
Cloud services provide visibility between departments and excellent inter-department
communication.
With Precoro ( cloud-based solution designed to streamline procurement processes for
companies) , any accounting systems or ERPs, such as QuickBooks, Xero, or NetSuite, are
easily integrated with your procurement workflow.
This end-to-end integration capability offered by cloud procurement platform eliminates room
for error, data redundancy, and manual intervention, ensuring the best procurement process
experience.

5. Power of E-Invoicing
Thanks to an efficient three-way matching process offered by cloud procurement solutions,
payments to the vendor are processed on time.
You can compare an electronic invoice with a receipt and purchase order in a couple of clicks.
Accounts payable teams can use electronic invoicing to automate the verification of invoices
before sending them for approval. These checks ensure that all figures are accurate.

Conclusion
Cloud services allow storing and accessing data via the Internet, while cloud-based
procurement automates the process from purchase to payment.
There are three types of cloud computing: Infrastructure as a Service, Platform as a Service,
and Software as a Service. The main difference between them lies in cost and the level of
control of resources in the cloud.
To successfully move to cloud-based procurement, involve key stakeholders in the process
from the outset so that they have a clear understanding of both the goals and the desired
outcomes for their company.
Make sure the platform you choose contains all the essential features for a simple and efficient
procurement process.Carefully read the user agreement and use a cloud service that encrypts

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your files both in the cloud and on your computer.The company providing service should be
ICO- and SOC-certified as well as GDPR-compliant.
If you follow the above-mentioned tips and choose the right cloud-based procurement platform,
you will soon see how cloud solutions provide cost savings, offer seamless integration
capabilities, streamline supply chain interactions and companies spend culture.
Cloud technology has already helped thousands of organizations improve their procurement
processes.

CAPEX VS OPEX SHIFT

Introduction

Although most organizations are known for being specialists in their respective
industries, they all share the same, lesser-known talent: juggling.

To keep things growing and running smoothly, businesses of all sizes need to b e able to
juggle a seemingly endless number of responsibilities – two of the big ones being capital
expenditures (CapEx) and operating expenses (OpEx). But what exactly are CapEx vs.
OpEx cloud financial models?

In short: cloud capital expenditures are large investments in mission-critical fixed assets
whereas cloud operating expenses are the costs associated with day-to-day operations.

With worldwide IT spending expected to grow >5% in the next year, more businesses are
taking a closer look into their CapEx vs. OpEx cloud portfolios, and analyzing how
implementing IT cost optimization in either can affect their budgets.

What Is CapEx In Cloud Computing?

CapEx in cloud computing is like the traditional CapEx model briefly outlined above.
However, in this case, capital expenditures are all cloud-related and refer to the costs the
organization must incur to purchase fixed assets that will offer ongoing, long -term
benefits well past the current tax year.

Typically, these assets are large, one-time investments that the company will solely own
after the transaction is complete. Since these are high-dollar, high-consideration
purchases, there’s plenty of planning (not to mention a lengthy approval process) to be
completed before the asset is acquired.

It can take some time before a company can utilize its CapEx investment. For example,
an organization may complete the real estate transaction for a data center, but they won’t
be able to use the asset immediately because they still need to build out the space.

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6 Examples Of CapEx Assets In Cloud Computing

Also referred to as property, plant, and equipment (PP&E), popular examples of cloud
CapEx items are:

 IT infrastructure (servers, routers, switches, software, network cabling, etc.)

 IT equipment for employees
 Data center real estate purchase
 Real estate renovations
 Asset upgrades
 Infrastructure repairs

Benefits And Challenges Of CapEx Spending In Cloud Computing

Some key features that separate CapEx in cloud computing include it being an investment
strategy for mission-critical items that exist on-premises and, regarding taxes, assets are
deducted as they depreciate over time. And, as with any financial model, there are unique
benefits and challenges when taking a CapEx approach to cloud spending.

CapEx Benefits

 Expected costs: Although costs associated with CapEx IT investments can be daunting,
they’re expected and consistent, which is beneficial. This allows organizations to budget
accordingly.
 Asset ownership: The organization buying the asset is the sole owner.
 Expenditure stability: When using a CapEx model, businesses know their associated
costs, and can create models that forecast costs as needed.
 Full control: Since the company owns the hardware or other asset, they have complete
control over access, security, and updates.

CapEx Challenges

 Large upfront costs: Since you need a lot of cash to get started, it can be challenging to
allocate funds toward other much-needed business expenses or revenue-generating
initiatives. Additionally, this can serve as a barrier to entry for smaller businesses lacking
the available capital.
 Big commitment: CapEx investments tie-up a chunk of cash. This can make things more
difficult if a future business decision causes a change in direction as your company grows
or IT technologies advance.
 Extended approval processing time: When making such expensive purchases, the
budget estimation, consideration, negotiation, approval, and final fund release processes
can take a significant amount of time.

 Full responsibility: By being the primary owner, the business takes on full responsibility
for maintenance, repairs, upgrades, additional costs associated with supporting
infrastructure, and unexpected expenses, such as suddenly replacing or repairing critical
infrastructure.

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What Is OpEx In Cloud Computing?

OpEx in cloud computing is similar to a traditional OpEx strategy. However, as with

CapEx, all operating expenses support public cloud, private cloud, hybrid cloud,
and/or multitenant cloud initiatives. Rather than revolving around a large, up-front bill,
OpEx purchases are typically pay-as-you-go or subscription-based. With that, OpEx
assets are not solely owned by the organization using them, but by the service provider.

Additionally, in general, these assets are available to be used immediately (or very soon
after the contract is signed), whereas it can take some time to reap the benefits of CapEx
assets after the initial investment.

6 Examples Of OpEx In Cloud Computing

A few examples of operating expenses in cloud computing include:

 Business-related operating costs (rent, utilities, salaries, legal fees, marketing, etc.)
 Data center or off-premises cloud costs
 Cloud-based software, application, or service subscription fees (SaaS, DaaS, IaaS, etc.)
 Webhosting and domain licenses
 Software and service support
 IT infrastructure maintenance and repair fees

Another important OpEx example is the cost of goods sold (COGS), which is also referred
to as the cost of sales. COGS are the costs an organization encounters when developing,
launching, and running subscription-based cloud services or products.

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Benefits And Challenges Of OpEx Spending In Cloud Computing

Several key components distinguish cloud OpEx costs, including the ability to deduct
operating expenses during the same tax year they were incurred, less commitment, and
the use of third-party services. As with CapEx, this model also boasts unique benefits and
challenges.

OpEx Benefits

 Smaller investment and approval time: Since the OpEx model functions on a
subscription basis and doesn’t involve a hefty cash commitment, you need less budget to
be approved to quickly kick things off.
 Less responsibility: When using a managed cloud service provider (MSP) or cloud
provider (think AWS or Azure), the business is not in charge of upgrades or day-to-day
maintenance. Instead, the responsibility falls on the third-party provider.
 More flexibility: When using OpEx cloud-based SaaS providers, there’s no locked-in,
long-term commitment outside of the contract. So, it’s easier to switch providers, scale
back services, or incorporate additional compatible solutions as needed.
 No overprovisioning: With a subscription-based cloud, you can autoscale up and down
as needed. You won’t need to worry about overprovisioning to allow for potential spikes.

OpEx Challenges

 Ongoing and varying costs: Depending on the service, the costs associated with many
OpEx-related items can vary significantly depending on multiple factors, including
service-level upgrades or resource consumption.
 Less ownership and control: OpEx items are leased or rented from a service provider,
and the organization contracting the resources does not own the asset itself and has less
control over its capabilities.
 Unclear expenses: Considering private, hybrid and, public cloud costs can vary, it can
be difficult to see exactly why costs are changing or who is driving the fluctuation.
However, by incorporating the proper tools, like cloud monitoring, you can have clear
insight into your spending and usage.
 Struggles in reporting: There may be grey areas in what’s considered regular operating
expenses vs. What’s considered the costs of goods sold. With that, cost allocation issues
can arise that impact gross margin analysis and projections.

Understanding CapEx vs. OpEx Cloud Services

As you begin building your financial budget, you may be wondering what popular cloud
services should be listed as CapEx vs. OpEx for accounting purposes. So, let’s briefly
explore two of the most widely used: Amazon Web Services and Microsoft Azure.

Is AWS CapEx Or OpEx?

Amazon’s public cloud operates under a usage-based model for its core services. So, those
services would fall within the OpEx budget. AWS requires short-term contracts (usually

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one to three-year terms) for certain cloud services. These contracts are paid in advance
and deemed CapEx.

Is Azure CapEx Or OpEx?

As with AWS, Microsoft Azure can be either CapEx or OpEx depending on the package.
For example, Azure Reserved VM Instances are billed in advance with one-year or three-
year commitments. Since this service is paid upfront, it can be considered CapEx. On the
other hand, if the business goes with the Azure pay-as-you-go subscription and is billed
repeatedly for the services used, it’s considered OpEx.

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How Does Cloud Computing Shift CapEx to OpEx?

The cloud has empowered more organizations to shift their IT expenses from CapEx to
OpEx. How? By removing major upfront costs and replacing them with manageable, more
consistent monthly or annual fees.

Cloud-based SaaS technology brings more cost control and agility to businesses, which
has caused more IT managers to take advantage of its value propositions. By offloading
the headache of CapEx infrastructure investment and maintenance to third party
providers, IT teams have extra time and budget to focus on other initiatives that will bring
additional value to the business, like:

 Building new products

 Improving customer experience
 Investigating new technologies and innovative solutions

Capex vs. OpEx Cloud: Which Is Right For you?

All in all, cloud computing is complex from either standpoint. So, should you choose
CapEx stability or OpEx flexibility? CapEx and OpEx strategies have their pros and cons,
and the impact of each varies depending on a multitude of factors unique to each
company.

CLOUD SERVICE CHARGING

Cloud Service Cost Overview
Though many factors can affect the cost of cloud services, and costs can vary widely between
vendors, the following table gives an overview of the most significant factors.

Pricing Factors Cost

 Based on bandwidth usage

Network Infrastructure
 Usually measured by month
 Example: Starts at $2.50 per month
 Varies by storage type and amount
 Usually measured by user, by month
Storage
 Example: Free (limited storage) to $15/user/month
(unlimited storage)
 Covers upkeep and software updates
Maintenance and Updates  Usually measured per month for number of users
 Example: Starts at $5,000 per month/500 users

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 Exit fees: Typically confidential; depends on

contract
Hidden Charges
 Region and availability zones
 Support costs

What Do Cloud Services Cost?

Determining the cost of cloud services can be a tricky proposition. While most cloud service
vendors offer a pricing calculator that lets you choose services and products and enter usage
requirements to generate an estimate, it’s not always obvious what your needs will be or how
the charges will add up. Here’s a look at the most common ways vendors approach cloud
computing costs.

Pricing Factors

Several factors come into play when providers set the pricing for cloud computing, including
the types and quantity of services and computing resources required, data transfer rates, and
storage needs.

 Networking: Cloud computing services require a robust network infrastructure for

interconnectivity, and networking costs are based on bandwidth usage and data transferred
in or out of the cloud infrastructure.
 Storage: Cloud vendors also charge for storage used, typically on the type of storage (files,
block, elastic, etc…), performance, features, and accessibility.
 Hardware and Maintenance: Providers need to invest in hardware (drives, memory,
processors, servers, routers, firewalls, etc…), continuous updates, and maintenance.

Hidden Charges

Providers sometimes charge hidden expenses that can drive up costs. Some of the most
common to watch out for include the following:

 Data Overages: Cloud vendors generally offer fixed data limits and storage in their pricing
plans, and exceeding limits incurs additional costs.
 Exit Fees: Some vendors charge them to retrieve your data if you discontinue your cloud
computing services.
 Region and Availability Zones: Most vendors charge different rates for services across
different regions and availability zones; check pricing based on your region.
 Support Costs: Vendors may charge additional for tracking support issues.

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Pricing Models
Different providers also offer different pricing models—here are the most commonly used:

 On-Demand: This is a pay-as-you-go plan billed on a per-second or per-hour basis,

depending on usage; this model is all about flexibility, scalable with no upfront
commitments.
 Instance-Based: In this model, costs correlate with the cloud instances or virtual servers
being used; the bill reflects the number of dedicated servers and hosts allocated to you.
 Tiered: Much like a restaurant menu, tier-based pricing presents a variety of “plans” or
“bundles” from basic plans with essential features to premium offerings packed with
advanced functionalities; select the level of service that aligns with your requirements and
budget.
 Subscription: This model turns cloud computing services into a recurring expense; you can
opt for monthly, quarterly, half-yearly, or annual plans, allowing for predictable budgeting.
3 Types of Cloud Computing Services

There are a wide range of cloud computing services available to individuals and enterprise
users. To understand pricing and make more clear comparisons, it’s important to first
understand the most commonly used models: IaaS, PaaS, and SaaS.

Infrastructure as a service (IaaS) is generally billed monthly. Billing rates for the entire
month would include servers that have been running for a full 30 days, as well as servers that
have been running for just one minute. A calculation cycle is billed for a full hour, whether it
lasts a minute or an hour.

Actual usage billing allows PaaS providers to run application code from multiple tenants on
the same set of hardware-based on the granularity of usage monitoring.

SaaS (software as a service) measurement refers to the methods and tools used to track the use
of software delivered by the customer through the cloud. SaaS providers have a variety of
options to measure the use of the solutions they provide to customers, including measurement
by the user, by account and by the transaction.

Cloud Providers Pricing Comparison

Now that you’ve learned how pricing works, here’s a look at how the cloud computing costs
of the major providers compare to one another. Though many cloud services providers offer a
wide range of cloud computing services, for the purposes of this guide we’ve focused on the
five most widely used by enterprise clients: Amazon Web Services (AWS) Lambda, IBM
Cloud Code Engine, Azure Cloud Services, Google Cloud Platform, and Oracle Cloud.

AWS Lambda

Amazon offers a wide range of products for cloud computing, but its AWS Lambda is a top
serverless computing service that allows businesses to run code, automate administration and
management, and package, deploy, and orchestrate multiple functions.

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AWS Lambda offers one million free requests per month as a part of the AWS Free Tier plan.
It has a flexible pricing model with its Compute Savings Plan, measured in dollars-per-hour.
Users can save up to 17 percent with this plan in exchange for a commitment to a fixed usage
amount.

In response to an event notification trigger, Lambda generates a request and charges for the
functions used. The cloud service cost is calculated by duration-in-milliseconds for the time
your code executes and the memory allocated to your functions and processor architecture.

Requests/Memory
Architecture Duration Price
allocated

X86 (First 6
$0.0000166667 for
Billion GB- Per 1M requests $0.20
every GB-second
seconds/month)

Arm Price (First

$0.0000133334 for
7.5 Billion GB- Per 1M requests $0.20
every GB-second
seconds/month)

Per 1 millisecond memory

X86 128 MB memory $0.0000000021
usage

Per 1 millisecond memory

Arm Price 128 MB memory $0.0000000017
usage

IBM Cloud Code Engine

Category CPU Memory Incoming Requests

100,000 vCPU 200,000 GB 100,000 HTTP requests per

Always Free
seconds per month seconds per month month

Beyond Free $0.00003431 per $0.00000356 per

vCPU second GB second $0.538 per 1 million HTTP
Tier
requests

IBM Cloud platform is a robust ecosystem and computing solution based on a serverless
architecture. It offers a single runtime environment with automatic scaling and secure
networking. IBM Cloud Code Engine is priced by resources used, and is based on HTTP
requests, memory, and vCPU consumed by your workloads.

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Azure Cloud Services

Microsoft’s Azure Cloud Services is a PaaS model that offers a deployment environment for
cloud applications and services with high availability and flexible scalability.

It includes free trial services for a limited period—some Azure products remain free for a fixed
number of requests, instances, memory used, or hours used, while others are free for a fixed
12-month period. Popular free services include Azure Virtual Machines Windows and Linux
versions, Azure Functions, and Azure App Service.

The pricing plans follow a pay-as-you-go model that considers such different factors as
instances, cores, RAM, and storage. There are various virtual machine series for different
needs. For example, the A series is ideal for entry-level dev/testing, the B series is for moderate
workloads, and the D series is for product workloads.

Instance Cores RAM Temporary Storage Monthly Price

A0 1 0.75 GB 20 GB $14.60

A4 8 14 GB 2040 GB $467.20

D1 1 3.50 GB 50 GB $102.20

D4 8 28 GB 400 GB $817.60

D14 16 112 GB 800 GB $1,541.03

Google Cloud Platform

Google offers enterprise-ready cloud services through the Google Cloud Platform. It includes
a suite of computing products like the App Engine, Compute Engine, VMWare Engine, Spot
VMs, Cloud GPUs, and more, as well as an integrated storage solution.

Google follows the pay-as-you-go pricing model with additional discounts for prepaid
resources. It also has free-tier products with a specified free usage limit—new customers get
$300 free credits. The Compute Engine usage is measured in gibibytes (GiB). It is calculated
based on disk size, network, and memory usage.

Each Google product has different pricing, which can be estimated using the pricing
calculator or by contacting the sales team for more details.

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Category vCPUs Memory Monthly Price

c3-standard-4 4 16GB $152.48

c3-highmem-4 4 32 GB $205.74

e2-standard-2 2 8 GB $48.91

e2-highcpu-16 16 16 GB $288.89

Other Cloud Services

In addition to the top five, other cloud service vendors provide computing services at varying
costs. The following chart offers a quick comparison of their pricing structures.

Name Solution Starting Price Free Trial

Alibaba Elastic General Purpose with Free basic plan

Compute High Clock Speed $135.02/month with Alibaba
Service ecs.hfg5.large Cloud Services

$200 credit for the

Digital Ocean Kubernetes $12/month/node
first 60 days

Hostinger Cloud Startup $9.99/month 3 months free

Hostwinds Cloud Server $0.006931/hour No free trial

Salesforce Sales Cloud $25/user/month 30 days

Bottom Line: Understanding What Cloud Services Cost

As businesses increasingly embrace digital technology, the cloud continues to evolve, offering
more powerful tools and services. The immediate positive impact of cloud technology is
undeniable—more than 90 percent of enterprises use cloud services, and 80 percent of them
see significant improvements in their operations within months of implementation. Investing
in cloud computing sooner rather than later can yield substantial benefits and keep your
business competitive in the global market.

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But cloud computing is not a one-size-fits all service, and not all vendors offer the same pricing
structures. Understanding how the market works, the factors that affect cloud service cost, and
what your specific needs are can give your organization a leg up on finding the right service
provider and the right cloud services to meet them.

CLOUD COST MODELS

Introduction
Prominent businesses prefer the cloud for their apps to serve, win, and retain customers. The
demand for cloud computing is growing in all its forms. According to the Market Research
Firm Gartner’s new market forecast, this growth is estimated to be 18% by 2020. The
worldwide revenue has increased from 209 billion USD (United States Dollar) to 246.8
billion USD.

Each company’s infrastructure is unique, and thus cloud computing service demands are
different for every client. Cloud computing service providers supply cloud computing
models based on customer’s demand suitable to the infrastructure and market.

There are different categories of cloud computing cost models depending on four major
parameters viz.: fact, value, demand, and supply. Other several factors such as cloud
technology, business strategy, competitive market environment, investment budget, and
targeted customers are considered while mapping cloud cost models into different categories
and strategies. There are three strategies for costing and a 3X3 matrix for the value that
defines a conceptual framework to examine systematic cloud cost models.

What are the Cloud Cost Models?

Cloud cost models are dynamic in nature as the supply and demand keep fluctuating. These
depend on multiple characteristics and are auction-based, time-based, or cost-based. There
are three cloud pricing strategies that are subjective (value), objective (fact), and market-
based. Demand drives value-based cost; supply drives cost-based cloud model; whereas an
equilibrium of both supply and demand drives the market-based cloud model.

Cloud cost modeling has research challenges that include moving from pure cost-based to
both value-based and cost-based cloud cost modeling. Other challenges are moving from
statefulness to stateless pricing, transferring from mutable to immutable pricing, and
developing cloud cost models that attract cloud customers. Sixty different cloud cost models
are determined as per this analysis.

Let us understand what different cloud service cost models are:

1. Service-Based Cost Model

It emphasizes value delivery with physical product-oriented pricing. Service-based cost
models are used in banking, airline, travel, legal consultant, insurance, hospital, and so forth.
The service-based model’s value is measured using the unit of a level, tier, per device, user,
and priority. The value of this model can be identified and predicted.

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2. Performance-Based Cost Model

It is an arrangement in which the seller pays based on the actual performance of a cloud
model or service as per M. McNair’s definition. It is connected to the client’s business
outcome that relies on specific performance metrics. Examples of this model’s applications
include telecom services such as mobile apps, multi-party video conferences, satellite
connectivity.
3. Customer Value-Based Cost Model
It sets a price from a subjective view of a client focusing on the client’s value delivery.
There are four categories of value-based cost models: perceived value, feature,
psychological and hedonic-based model. The construction of these models is based on
perception, sociology (large environment), psychology, and economics (utility). The
customer value-based cost model maximizes the business’s profit and leads in the market.
4. Free Upfront and Pay Later Cost Model
The competition among cloud service providers is increasing along with its demand. Many
cloud service providers offer free upfront and pay later cost models to leverage their
products with basic features to gain more customers and make profits from premium clients.
Three cost models are available viz. free product cost on advertising, freemium, and razor
and blades cost model.
5. Auction and Online-Based Cost Model
Auction based cost model decides the pricing. As per Asuncion Monchan, an Auction is a
market mechanism, operating under specific rules that determine whom one or more items
will be awarded and at what price. It is relatively faster and transparent, with no backward
and forward processing steps.
6. Retail-Based Cost Model
It is based on a small number of customers that buy from physical locations/ retail outlets.
It applies to the B2C (Business-to-Consumer) model. It has four subcategories of cost
model: discount and allowances, product mixing, promotional and discriminatory pricing.
7. Expenditure Based Cost Model
A cost is decided on using the application for a central component as a unit of charge. It has
three types of cost models: cost-plus, target return, and percentage cost model.
8. Resource-Based Cost Model
This cost model depends on the consumption of services. It is one of the categories of cost -
based cost model strategy.

Conclusion

A range of models from pure subscription (Pay Per User) to resource-based on demand is
available for customers. In the subscription model, payment is charged whether the client
uses services or not, but cost models based on the market are set only when services are used
(Pay As You Go). A combination of both can be provided with subscription offers
depending on the cloud service provider.

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