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Pricing models for cloud services are evolving, and range from free and ad-based models to pricing based on volume, transaction, or user, as shown in figure 1 below.

For example, a cloud service provider may opt to provide a basic level of service for free, with premium upgrades. This "freemium" model reduces barriers that customers may have in trying out the software. Once they've started to derive some business value from it, customers are likely to consider upgrading to a paid version of the solution. Usage-based or transaction-based models also closely map to value. Transaction pricing and paying per unit of measure may not be applicable for every application, but sophisticated billing, provisioning, and metering techniques enable cloud providers today to offer more flexible pricing models.

Figure 1. Different cloud pricing models

(Source: Netmagic Solutions, 2012)

Pricing structures for the cloud are based on a various factors ranging from storage space needed to clock cycles used to monthly traffic allotments, and it does not end here. Sometimes there are additional charges hidden deep within service level agreements (SLAs). To arrive at a total pricing for a cloud service, user organizations must take note of individual service elements that a provider bills for and how these are calculated. Does the provider, for instance, bill based on traffic, storage space needed, server CPU time or a combination of these factors along with other elements?

Another critical factor in determining the total cost is the type of service required. For some users, the service may be a little more than a hosted, dedicated server to running applications in the cloud. For others, the service may be cloud-based backup or business continuity or basic hosted storage.

The easiest way to break down pricing is to focus on the primary services offered. Most cloud service providers break down their services into three primary areas: servers in the cloud, storage in the cloud, and sites and applications in the cloud. Each is governed by its own formula for pricing.

Servers in the cloud come in two forms: virtual and physical. In other words, organizations can either purchase time on a virtual server (where the physical hardware may be shared with others) or time on a dedicated server (where it is the only 'tenant' on that server). Prices for cloud services can also vary depending on the length of commitment, total bandwidth needs or total size of storage required.

Different services, different providers

All cloud service providers are different with respect to their business models and the way in which they address their customer's needs. However, a cloud service provider must take into cognizance the following while arriving at a strategy to price the cloud and accordingly devise a pricing plan:

a. Costs

In order to determine a pricing model that provides business value to an organization using cloud services, it is necessary to know the direct and indirect costs of providing these services. For example, in the case of an infrastructure-as-a-service (IaaS) deployment, the cost can be modeled as a fully loaded cost per server or per virtual machine. Costs can be initial or ongoing. Initial costs, also known as capital expenditures, or capex, include the costs to acquire assets such as hardware and facilities. These include:

• Facility construction or acquisition
• Power and cooling infrastructure
• Server, network, and storage hardware
• Software licenses, including operating system and application software
• Racks, cables, and installation

Ongoing costs, also known as operational expenditures, or opex, include all costs for keeping the business or facility running. These include:

• Payroll
• Facilities maintenance
• Hardware maintenance
• Software maintenance
• Other fees such as insurance, legal, and accounting fees