Cloud Service Management

Cloud Services Management 3-28

Notes
UNIT IV

4| Cloud Service Economics

Syllabus
Pricing models for Cloud Services,
based Charging, Freemium, Pay Per Reservation, Pay per User,
Procurement Cloud-based
of
Charging, Cloud Cost Modelg Subscription
Services, Capex vs Opex Shift, Cloud service
Contents
4 Pricing Models for Cloud Services
4.2 Freemium
4.3 Pay Per Reservation
4.4 Pay per User
4.5 Subscription based Charging
4.6 Procurement of Cloud-based Services
4. Capex Vs Opex Shift
4.8 Cloud Service Charging
4.9 Cloud Cost Models
4.10 Two Marks Questions with Answers

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 Cloud Service Economics
Cloud Services Management 4-2

4.1 Pricing Models for Cloud Sevices

"A major condition for commercial success is a well-defined pricing strategy, however,
pricing. Clearness and transparency in
cloud service providers face many challenges around
pricing is beneficial for all the actors in the ecosystem, where the currently existing
abundance of different pricing models makes decision making difficult for service

providers, partners, customers and competitors.

which provides cloud services because it
Price isthe
affects an important factorand
clients directly for organization
the companyprofit. Pricing for competition and fairness
affects choices in the design of user applications and system infrastructures. In fact pricing
fairness balances user cost and cloud service provider profit.
traditional models. Every cloud
Pricing model in cloud computing is more flexible than
cloud computing is to fulfill and
provider has its own pricing scheme. Main focus of
guarantee Quality of Service (QoS)for customers.
cloud computing and value chain is based on business models and framewor
Ihe price in
changing as a result of cloud computing.
The value chain from the traditional IT services is
accounting model. (Refer Fig. 4.1.1on next page)
" Fig. 4.1.1shows cloud computing cost services:
the cost of cloud computing
There are three main components that determine
range of compute instance types, each
1. Compute : Most cloud providers offer a
and in some cases, specialized
offering a certain amount of CPU resources, memory
acceleration. The customer pays
hardw are such as fast networking or graphics
the duration they are used.
according to the number and types of instances used and
bill customers according to the volume of data
2. Networking : Most cloud services
cloud service (egress), or both.
transferred into the cloud service (ingress), out of the
network services such as static IPs, load
There may be special charges for virtualized
balancersand gateways.
a service. For elastic storage services,
3. Storage : Cloud providers offer storage as
utilized. For managed storage
customers pay by GB-month of storage actually
instances, customers pay for an
services, such as managed disks attached to compute
storage utilized on the volume.
entire storage volume, regardless of the amount of
follows :
Various pricing models based on the services are as
used;
1) Time based, pricing based on how long a service is
2) Volume based, pricing based on the volume ofa metric;
3) Flat rate, a fixed tariff for a specified amount of time.
4) Priority pricing, services are labeled and priced according to their priority;

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Cloud Services Management 4-3 Cloud Service Economics

SaaS Service 1 Service 2 Service 3

PaaS Platform 1 Platform 2

Infrastructur
laaS Instance price

Cloud Cloud fixed

utilization cost Cost

Virtual machine
cost
Hardware cost (Maintenance cost
Server cost
Software cost Network cost

Cooling cost Facilities cost

Rack cost
Power cost Rea-estate cost

Fig. 4.1.1 Cloud computing cost accounting model

5) Edge pricing, calculation is done based on the distance between the serice and the
user;
6) Responsive pricing, charging is activated only on service congestion;
7) Session-oriented, based on the use given to the session;
8) Usage-based, based on the general use of the service for a period of time, e.g. a month:
9) Content-based, based on the accessed content;
10) Location-based, based on the access point of the user;
11)Service type, based on the usage of the service;
12) Free of charge, nocharge is applied for the services;
13) Periodical fess, payment of time to time quantities for the use of a service:
14)Pre-paid, the payment of the service is done in advance.
15) Post-paid, the payment of the service is done after the use:
16) Online, the accounting performed while the user makes use of aservice:
17) Offline, the accounting process is done after a service is used:

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 Cloud Service Economics
Clovd Senvices Management 4-4
" Resource's consumption based pricing is particularly sensitive to how asystem is designed,
configured, optimized, monitored, and measured. Cloud services vendors use a variety of
pricing mechanisms, including Usage-based fixed pricing, usage-based dynamic pricing,
subscription-based pricing, reserved services contracts with a combination of usage-based

fixed pricing and up-front fees, auction-based pricing, ete.

" Fig. 4.1.2 shows factors that influence the price of cloud resources.
Provider
reputation
Monitoring service

Public review
Socialcategory of
Customers Cloud resource
price
Cost of data SLA
center

Type of cO-cloud
User reputation users

price of cloud resources

Fig. 4.1.2 Factors that influence the

are as follows :
Some factors that influence the price of cloud resources
offered a fair price, however. i
1) Social category of customers, all clients should be
classifications. Classification shoud
should be viewed social aspect of clients or social
be done depending on client's location.
2) Cost of data center, the price should be
calculated for data centers, as cost of real
connectivity, security
estate, backup power, maintenance, cooling resources, network
features etc.
special importance in cloud services
3) User reputation, the reputation of the users has a
considering various attacks, sniffing programs, Trojans etc.
necessary to create a trust from
4) Provider reputation, cloud provider's reputation is also
The reputation is the
the community when it is known that may have sensitive data.
cloud infrastructure for
component of trust and it also measures reliability. Using
cloud provider is
critical business computation necessitate that the reputation of the
well established.

5) Public review, public reviews on issues such as downtime,

phishing and data losS and
password weakness can be valuable in pricing of cloud services.
services between cloud
6) SLA (Service Level Agreement) is a negotiated agreement for
providers.
providers and cloud customers. Most often SLAs are dictated by the cloud

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 Cloud Services Management 4-6 Cloud Service Economics

7) Co-cloud users, the nature of multi-tenancy in a cloud could enable competitive

o companies to use the same cloud platform. Informatíon about co-tenants in the cloud
can be used to influence service price.
Cloud providers offer different options for their customers in terms of pricing The most
common pricing models at cloud providers are:
o1. On-demand pricing
2. Spot pricing
3. Reserved instance pricing
4. Volume discounts or tier based pricing
" Fig. 4.1.3 shows cost pricing model.

Per license
per user Freemium

Revenue Advertisement
share based
(Affliation) revenue

Monthly
subscription Pay-per-use

Fig. 4.1.3 Cost pricing model

The three main categories of costs typically associated with setting up and maintaining on
premises infrastructure:
a) Capital costs: server software, licensing and hardware, as well as network
infrastructure, storage environments and backup systems.
b) Operational costs including support for server and network infrastructure, as well as
storage warranty, data center facilities, existing system administration labor costs, and
IT staff training and turnover.
c) Indirect business costs including unplanned and planned downtime.

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4-6 Cloud Service Economics
4.2 Freemium
to attract users to a
Freemium model is an acquisition strategy used
"
providing basic features for free, and advanced features for
apremium. product/service
commodity as the cloud vendor
" Cloud services are moving clOser towards
continues to crowd. This pricing model attempts to grab
customers in the
to
Computing cycles, bandwidth, and storage are getting cheaper. This leads the
marketplaceway.
quickest
that application cloud development will get cheaper by the use of
environments, storage and platform services utilization.
free
assumpt io
clfree,oud-hostingn
Freemium. in reality, consists of two words : Free and Premium. It starts for la user
pay for service labeled as "Premium". later
" The main purpose of a freemium pricing strategy is to encourage users who have registered
for the free version of the product or service to eventually want to upgrade to the paid
versions or options later on.
This pricing model is widely used in the promotion of digital products and services, such
Software as a Service (SaaS), video games (Gaming) and media (especially online
" Fig. 4.2.1 shows working of freemium.
music).

Free Premium

Basic services
Ifeatures for free
Freemium Free
Business Advanced Products / services
fees
yearly services
Imonthly
features Free
users
for

Premium Paid users

Customers
services

Fig. 4.2.1 Working of freemium

This approach will result in a large proportion of customers using the company's offerings
for free and a smaller proportion paying for additional services. This approach has had
notable success on the Internet, where basic services can be provided by the seller at close
to a zero variable cost. The concept allows a company to scale its customer base rapiay
with littleor no incremental cost for each additional customer gained and then charge t0r
additional services.

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Freemium pricing can be applied to the following circumstances

1. Customers can use a service for a certain amount of time for free. after which they will
be charged for any continuing provision of services.
can scale
2. Customers have access to a version of the service that has few features. and
to an expanded version by paying a price.
3. Only students are allowed the free service, with coporations paying the full price.
the servíce and later
This approach assumes that students will become hooked on
demand that companies they work for buy it.
such as one dowzioad per
4. Only allow a certain amount of usage per time period,
service, they are
month, without paying extra. As users become more enamored of the
more willing to pay for greater volume.
in 2016 with an
Example : Reliance Jio began by offering free introductory access
of their target,
ambitious goal of 1million new subscribers per day. Having fallen short
is an extended free tríal for
they continued this free offer until the end of March 2017. This
an unfamiliar service to most of the market, nearly six months of
free 4G high-speed mobile
data, calls and messaging, before then offering a range of premium-priced packages, which
translate into higher ARPUs than the Indian average of 150 rupees / month.
FREEMIUM model,
" Some of the world's largest companies have been built with the
including : Hubspot, Dropbox, Sendinblue, Spotify, Deezer, TikTok and Google.
On social networks such as TikTok or Instagram, the goal of the FREEMIUM strategy is to
reach acritical mass of users with the ultimate goal of getting money by advertising brands.
Web influencers operate under a FREEMIUM model by offering their content for free to
the community and then getting money by advertising different products.
4.2.1 Difference between Freemium Business Modeland Free Trial Strategy
Sr. No. Freemium business model Free trial strategy

1 It is usually offered free forever:. It is limited for a particuiar duration.

2 It offers limited functionality to entry level It usually offers complete functionality of the
users.
paid product.
3.l to 10 % of freemium users upgrade to a paid More than 30 % of free trial users convert toa
plan. paid plan.
4 Business-to-consumers and business-to Only Business-to-business market.
individual users.

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4.2:2 Advantages and Disadvantages of Freemium

Advantages of freemium:
Increased User Base
" Increased revenue: With the right pricing strategy, offering a free version of the
version.
product can increase revenue as customers upgrade to the paid
Improved engagement and retention.
" Different revenue streams possible.

Disadvantages of freemium :
" Itrequires high financial resources.
" Paid customers often remain a minority.
Increased customer service costs.

4.3 Pay Per Reservation

period, usually oneor
" In this model, businesses commit to cloud resources for an extended
higher the
three years. The longer the commitment and the greater the upfront payment, the
discount. Discounts can range from 50 -75% compared to pay-as-you-go rates for reserved
instances with similar capabilities.
Reserved instances are ideal for long-running systems and steady workloads but should not
be used for peak loads. For peak loads. it's better to use a combination of reserved, pay-as.
you-g0, or spot instances.
known as
" There are two provisioning plans supported by cloud service providers. They are
reservation and on-demand. The cloud broker has to determine the plan to be chosen.
" When plan is taken in advance, its provisioning cost gets reduced. The on demand plan is
considered to be on-demand plan while the reservation is considered medium to long term
plan.
Why buy a reservation ? If we have consistent resource usage that supports reservations,
buying a reservation gives us the option to reduce our costs. For example, when we
continuously run instances of a service without areservation, we are charged at pay-as-you
go rates. Once a reservation purchase is complete, we get the reservation discount. The
resources are no longer charged at the pay-as-you-go rates.
The commitments lead to a high loss in flexibility. The cloud market is rapidly changing,
and new instance types come up frequently. Reserved instances deny customers the chance
to use the newest instance types available.

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Resource requirements change quickly. In case an instance is not needed anymore or needs
alarger or smaller one, the customer stillhas to pay for it with reserved instances. There is
noon-demand resizing of resources as cloud computing instructs by definition.
Some cloud providers offer the possibility to resell on marketplaces. But it is not guaranteed
that some other customer willbuy the instance nor that the seller will get back the same
amount as has been paid upfront.
Reserved instances are suitable for steady state loads and long running systems. However,
organizations should not use reserved instances for peak loads. Instead, reserved capacity
should be used for core components of the system, and additional capacity required during
peaks should be handled using pay-as-you-go or spot instances.
Pros : Significant cost savings for long-term commitments, ideal for stable, predictable
workloads.
" Cons:Lack of flexibility,potential for wasted resources if business needs change.
4.4 Pay per User
" This is one of the most common pricing mechanisms, and this may include a number of
seats or named users. Once again, packaging the offering in such a way as to make
premium upgrades available, will help to ensure that customers are getting a low end, easy
point of entry and flexibility to upgrade in order to have access to an expanded set of
functions and features or to add more users.
Leveraging one or more of these monetization methodologies or creating a new one may be
the key to explosive and profitable growth for a new cloud solution.
Per-user pricing for cloud JaaS gives the flexibility and scalability to adjust our cloud
resources according to the demand and usage of users. We don't have to pay for unused or
underutilized capacity, or worry about overloading or running out of resources.
We can easily add or remove users as our business grows or shrinks, and only pay for what
we use. This can helps to optimize cloud spending and avoid waste.
Per-user pricing for cloud laaS also simplifies and clarifies cloud billing and management.
We don't have to deal with complex or hidden fees, such as bandwidth, storage or network
charges, that may vary depending on the provider or the region.
We also don't have to monitor or allocate cloud resources across different users, projects or
departments. We can simply track and control cloud costs by the number of users we have.
and see how much each user is consuming and contributing to cloud value.
Examples :
a) Office 365 provides per-user pricing, charging businesses a specific fee for each user
who needs access to their suite of productivity tools.

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4- 10 Cloud Service Economics
where businesses are charged per user
b) Slack offers aper-seat pricing model, who needs
to use their team collaboration platform.
4.5 Subscription based Charging
for
This cloud pricing model offers a fixed set of cloud resources predetcertain
ermined
a

typically on a monthly or yearly basis. User choose a package that includes

levels, computing power, and other services and then pay a regular, predictablestoragefee
regardless of the actual usage.
Subscription pricing is a pricing model where customers pay a recurring fee at
intervals, typically monthly or annually, to access a product or service. It allows
regular
to subscribe to a vendor's offerings for aspecific period of time in exchange for an agreed-customers
upon set price.
" Subscriptions work well because they provide a predictable revenue stream for
while offering convenience and value to customers. businesses
" When customers sign up for a subscription service, they agree to pay a regular fee on a
recurring basis. This provides a reliable source of income for businesses, which can help
with financial planning and forecasting. Companies like Netflix and Spotify have built their
business models around subscriptions. Customers pay a regular fee each month to access
their content, which provides a predictable revenue stream for the companies.
" Cloudservice providers often offer subscription pricing models for infrastructure resources
storage, and software tools. Customers pay based on the resOurces they consume, such as
virtual machines, storage capacity or data transfer.
" Most common types of subscription pricing models are as follows :

1. Flat-rate pricing model

" The flat-rate pricing model is the simplest and most common subscription-based
pricing model. With this model, customers pay a fixed fee for access to a product or
service for a set period of time. This pricing model is suitable for businesses that offer
a product or service that is used consistently over time, such as software or streaming
services like Netflix.
" Advantages of the flat-rate pricing model :
a) Simple to understand, communicate and sell.
b) Easier and more predictable billing process, simplifying accounts receivable and
other accounting functions.
c) Frees up time for companies to focus on monetization, acquisition and retention
instead of tailoring pricing strategy.

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 clovd SerVIces Management 4- 11 Cloud Service Economics

2. Tieredpricing
. With tiered pricing, customers pay different príces based on the level of service or
features they choose. This allows businesses to offer multiple packages at different
price points to cater to the diverse needs of their customers.
. For example, a software company may offer a basic plan for 10000/- per month that
includes limited features, a standard plan for 20000/- per month that íincludes more
features, and apremium plan for 30000/- per month that includes all features.
.This pricing model is suitable for businesses that offer arange of products or services
with varying levels of features or benefits, such as email marketing services or project
management software.
. Examples: Adobe Creative Cloud offers tiered pricing plans, such as the Photography
plan, Single App plan, and All Apps plan, with different levels of access to their suite
of creative software.
. Pros: Budget-friendly with predictable costs, which makes financial planning easier.
.Cons: Risk of paying for unused resources, less flexibility to adjust resources quickiy
Nbased on changing needs.

4.6 Procurement of Cloud-based Services

" A cloud-based procurement system is a fully integrated solution that streamlines the way
procurement teams operate and automate procurement processes. This end-to-end svstem s
built-in collaboration and data analysis tools eliminate process friction commonly created
by manual or disjointed workflows.
Why use cloud-based procurement ? Cloud-based procurement allows companies to
streamline their procurement processes from supplier management to sourcing and
invoicing. Software as a Service (SaaS) enables procurement managers to obtain their
required resources at an affordable price as well as considerable flexibility and security.
Cloud procurement software is based on one of the following three models:
a) Software-as-a-Service (SaaS)
b) Platform-as-a-Service (PaaS)
c) Infrastructure-as-aà-Service (laaS)
With these systems, we can easily perform all the following in one place and share the
findings with anyone all around the world :
a) Create purchase orders
b). Evaluate contract terms and negotiated prices
c) Manage revisions to documents

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4-12 Cloud Service Economics

Selectoptimalsuppliers
d)
e) Reverseauctions
supplier risk
) Evaluate
business costs under control
g) Keep
transaction time
h) Decrease overall
supplier invoices
i) Process non-manual
" Key features of cloudprocurement sofivare : Choosing the best procurement software can
challenging. time-consuming process due to the possibility of revenue loss, customer
be a
turnover and legal complications if we make the wrong decision. The main problems are
combined with the need to compare complex
the large number of choices available,
such as business value, cost,
customization and scalability. factors
Types of cloud procurement
procurement: Direct and Indirect.
" There are two main types of cloud
focuses on acquiring oond
. Direct procurement : This procurement cloud
services incorporated directly into a Cloud Service Provider (CSP). The organization
engages directly with the CSP and negotiates the terms, pricing and Service Level
Agreements (SLAs) without any intermediaries. Direct procurement grants
organizations greater control over the selection of cloud services, allowing them to
choose the most suitable CSP. However, the organizations do not have the resources to
manage the procurement process.
Indirect procurement : Indirect procurement involves organizations engaging with
or brokers to
third-party intermediaries such as Value-Added Resellers (VARS) the
a bridge between
procure cloud services on their behalf. The intermediaries act as
contract
organization and the CSP, assisting with tasks such as vendor selection,
negotiation, implementation and ongoing management.
" The benefits of cloud procurement generally include :
a) Cost savings
b) Accessibility
c) Process transparency
d) Efficiency
e) Automation
) Scalability
g) Better supplier management and regulatory compliance

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Shift
4.7 Capex Vs Opex
When it comes to procuring new equipment, software and capabilities, decision-makers
generally have two choices to go with :
Acquiring new capabilities and hardware as a capital expenditure (CapEx).
Acauiring new capabilities and hardware as an operational expense (OpEx).
4.7.1 Capex
ital expenditure (Capes) is the cost a business incurs to acquire assets that will provide
stands for
henefits beyond the current year. CapEx 1s also referred to as PP&E, which
equipment.
Property, plant and
Ey stands for Capital Expenditure and refers to the cost of purchasing valuable assets
mded for cloud computing. This includes things like servers, network equipment, storage.
and other IT infrastructure. CapEx is lower in cloud
computing compared to traditional IT
managed and maintained by
soutions due to the fact that the underlying infrastructure is
costs.
cloud providers, resulting in lower
Fxamples of CapEx in cloud computing include purchasing a server, network equipment,
storage and other IT infrastructure.
order to acquire new
When a company invests money, uses collateral, or incurs debt in
assets or increase their value over time, they incur capital expenditures. So, capital
expenditures are usually long-term investments in the business.
" CapEx examples of cloud computing:
a) Server and network acquisition
b) IT infrastructure acquisition
c) Datacenter upgrade costs
d) Software implementation exxpenses
"A business decides to incur capital expenses when they are planning to increase its asset
value, expand the range of operations, increase profit-generating activities and eventually
derive more benefit from the assets.
Essentially, a company will spend on capital assets for one of three reasons : maintenance,
growth or expansion.
" Capital expenses do affect the income statement of the company. But it does not happen in
the year of their purchase, but in the following years as per the depreciation value of the
assets obtained.
A typical on-premise IT infrastructure generally requires significant CapEx including
hardware, equipment and maintenance. The upfront costs are predictable, but the lifetime of
CapEx items and total maintenance costs are uncertain.

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 4- 14 Cloud Service Economics
Cloud Services Management
particularly 1T investments is that they
One risk of CapEx investments, may
outdated or even obsolete before they have paid for themselves. Cloud platformsbecome
Technology is constantly improving and ike
Microsoft Azure eliminate this risk.
it is imperative for a company's IT infrastructure to grow with its business.
IT is its inherent inflexibility. We may end
evolving, and
" capacity, our business does not require in the future, or in the future up
Another issue of CapEx in
pay1ng
end up in for
the
capacity
painstaking and expensive process of increasing
CapEx in cloud computing
1. Cost of
Challenges structure : Challenge of CapEx is creating an appropriate cost structure, It can be
investments, software
difficult to allocate costs betweeninfrastructure licenses and other
services accurately.
2. Lack of visibility : Business owners or inexperienced individuals may struggle to see
their CapExspending in the cloud clearly, making it difficult to track investments and
evaluate return on assets.
cloudi computing is
: Predicting future usage and demand in
3. Riskcanmanagement
and sdifficult
result in either overinvestment or underinvestment in infrastructure. leading to
unexpected costs and unplanned downtime for a business.
many businesses, and
4. Security : Protecting data in the cloud is a concern for
in cloud infrastructure may require additioal costs for hiring security personnel
an investing
solutions to ensure data security.

Characteristics of CapEx :
CapEx is a type of spending that enhances a company's long-term assets.
provide value to the
It is money used to purchase tangible assets that are expected to
company over a long period.
daily operations and
" CapEx is separate from operational expenses associated with
maintenance.
This type of spending typically includes significant investments like equipment, buildings,
and property.
" CapEx is used for maintaining and growing a company's current operations, as well as
acquiring new assets.

4.7.2 Opex
OpEx is short for operating expenses, also known as operational expenses and operatng
costs. Operating expenses refer to the money a company spends to run day-to-day
operations.
" Operational expendituresare recurring expenses, often intangible assets, incurred to suppo

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 coudServIcesManagement
4-15 Cloud Service Economics

Jav-t0-day operaios. nese Tunds are typically spent on consumable items or contracts
that will be used up and deducted from taxes at the end of the accounting period, or within
the year they are purchased. Other common OpEx examples include office rent, insurance
andpayroll.
Cloud environment on a platform like Microsoft Azure operates on an OpfEx model where a
company only pays for what it needs at the specific point in time, on a monthly basis. Risks
arelower andIno equipment maintenance is required.
The OpEx model of cloud computing ofers companies significantly more flexibility and
agility. Microsoft Azure scales up or down to meet your specific capacity needs and budget.
Deploymentand lead-time are also much shorter with the OpEx cloud approach.
Examples of OpExin cloud computing include:
using cloud services : Charges for using cloud services such as virtual
1) Fees for
machines, storage, or data transfer based on the amount of resources and duration of

usage.
2 Maintenance and support costs : To keep the cloud environment running smoothly,
maintenance and support may be required through contracts with the cloud provider or
in-house staff.
3) Management and security costs : To secure and comply with the cloud environment.
management and security tools such as firewalls, intrusion detection, and data
encryption may be necessary, with an ongoing subscription or licensing fee.
4) Training and education costs : Staff training on how to use and manage the cloud
environment may require hiring outside experts.
5) Development and improvement costs : Updating the cloud environment to meet
changing needs and integrate new services.
How IT services and consulting companies can assist businesses in shifting from CAPEX to
OPEX ?

a) Cloud migration:One of the most significant benefits of cloud computing is its

ability to shift IT costs from a CAPEX model to an OPEX model. IT services and
consulting companies can help businesses assess their current IT infrastructure and
determine which applications and workloads can be migrated to the cloud. This shift
Can help reduce the upfront costs associated with purchasing and maintaining on
n premises infrastructure while providing businesses with greater flexibility and
scalability.
S b) Managed services : IT services and consulting companies can provide businesses
with managed services to handle ongoing IT operations such asmaintenance,

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 4 16 Cloud Service Eo
CANK 5SeeMenne

monitorng and spnort. These

pay
services can be delivered
on a

for what they necd when they need it.

Economis
subscrThiiptsioncan bahelsisn
allou ing bsinesses to
while providing them with
hzsinexseN ndwe their upfront IT costs access 10
sport and resoures. eXpen
Vitnaliration : Virtualization technologics can help businesses. reduce their
infrastructure and run multiple virtual IT
o
by alkwing them to consolidate their Costs
on asingle physical server. This shift can help businesses reduce their
efficiency.
mac
hardwarehines
and
mantenance costs while increasing their IT
d} Sof are as a Service (SaaS): SaaS
applications are becoming increasingly
as thev software applications on asubscription basis. popular
allow businesses to access so
companies can help
) Financing options : IT services and consulting
financing options such as leasing, subscription-basedi pricing or pay-per-use models
businesses explore
473 Difference between Capex and Opex
Capex Opex

Catal erpenditure, or CapEx. refers to one Operational expenditures, or OpEx, 0S money spent
ti investments needed to acquire assets. on an on-going basis for abusiness to run operations.
Csts of long-term investments. Costs of day-to-day operations.

Canfx costs are generally more predictable. OpEx costs can be less predictable.

ore riskyand expensive way to acquire and More flexible and cost-effective options.
AK2in assets.
k cannot be recovered. It can be managed and controlled.

4.8 Cloud Service Charging

There are several factors that cloud providers follow before deciding the pricing of the

L. Pricing factors: The specific types and levels of customer infrastructure and services
drive cloud pricing. The costs incurred by the provider for procuring and managng
storage infrastructure and capacity. Expenditures related to computing infrastructure
ike servers, processing power and operating systems. It also includes investments into
network infrastructure, connectivity, traffic exchange and maintenance contracts.
Various resource types come with varying price points. As a customer consumes more
resources, the cost of cloud computing increases.

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 ld Services Management 4-17

2. Infrastructure costs includes data center kocafion, endyser . speianed

hardware and services etc.
Cloud providers have data centers located across different gsogsçhis rzns The
costs vary based on electricity rates, real estate prices, clmate cmtek needs. et
Popular areas with high demand have higher pricing. Less izgd eg ae
cheaper.
.Custom networking. high-performance computing options and maazsd serices
require extra infrastructure investments by the provider. It rests I p r T
pricing over standard configurations.
, Features and capabilities : Cloud providers offer a variety of instance types o sizes
for virtual machines to meet diverse customer needs
Tonls and features : Cloud platforms offer various tools and features brvoe h
computing, like monitoring, logging. security, backup. automation toois, devekçer
tools, etca
cost ?
" How to save cloud computing
. Here are three strategies for cloud computing cost savings.
1. Optimize available resources before making long-term commitments.
2. Reduce data transfer fees.
3. Prevent cloud sprawl.
4.9 Cloud Cost Models
Cloud cost models are dynamic given the erratic nature of supply and demand. These are
auction-based, time-based or cost-based, depending on various factors. There re hre
cloud pricing strategies : value-based, fact-based and market-based.
Value-based costs are driven by demand, cost-based costs are driven by suppiv. d an
equilibrium of supply and demand drives the market-based cloud model.
Consumption-based pricing model : User only pay for the utilized serv ices in this
arrangement, which is typical of Infrastructure as a Service. In these mdels user merely
make up for the number of resources used, such as storage space, CPL time and network
traffic.
Performance Based Pricing Model : It is a strategy in which the deaier is pad follow ing
the execution of a cloud service or model. It is connected to the customer's business
outcome, determined by precise execution measurements Applkations of the curent
approach include telecom services like mobile apps, multi-party video chats and satellite
connectivity.

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Coud Sennes Mansgement
418 Cloud Service Economics
Subscription-based pricing nmodel : It is a strategy in which the dealer is paid
connected to the customer for the
actual exccution of a clod service or model. It is s business
precise execution measurenments. Applications of he
outcome, detemined by
approach include telecom services like mobile apps, multi-party video chats, and curTrent
connetiity.
" Auction and online-based pricing model : The model decides on the
satelite
price.
Monahan claims that an auction is a market tool that operates under specified
determine who Nill receive at least one thing and at what cost. Without
Asnormsuncion to
backwand handling steps, it is transparent and generally faster. forward and
Advertising based pricing model : In a pricing structure based on advertising, the
is free or inexpensive but still includes advertising. As a result., the customer service
serv ice at a significant discount or for free and the
reverue from ads.
provider receives the
majorityreofceitvheseir
Market-based pricing model: According to an hour of CPU time, there is a market
for asenvice in this model. Over time, the market price changes depending on supply price
demand. We can start using it right now and pay the current price to use the service. and
Castomer value-based pricing model : It establishes a cost for consumera
from an
emotional standpoint while concentrating on the client's value delivery. This model can be
divided into four categories: hedonic, psychological, feature-based, and
models. These models creation is influenced by sociology, psychology, psychology and perceived-based
economics.
" Retaii based pricing model : It depends on a select group of customers who make
purchases in physical stores or other retail sites. The business-to-consumer model is
affected. Discriminatory. promotional, product mixing and discount and allowances pricing
are its four subcategories of the cost model.
4.10 Two Marks Questions with Answers
Q.1 Why use cloud-based procurement ?
Ans. : Cloud-based procurement allows companies to streamline their procurement processes
from supplier management to sourcing and invoicing. Software as a Service (SaaS) enables
procurement managers to obtain their required resources at an affordable price as well as
considerabBe flexibility and security.
Q.2 What is operating expenses ?
Ans. : Operating expenses is also known as operational expenses and operating costs. Operating
expenses refer i0 the money a company spends to run day-to-day operations. Operational

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Cloud Services Management 4-19 Ch Seree Eronomics

expenditures are recurring expenses, ofen intangible assets, incurred uo support dayto-4ay
operations.
03 List the example of CapEx in cloud computing.
Ans. : Example of CapEx in
cloud computing are as follows:
Server and network acquisition
. IT infrastructure acquisition
. Datacenter upgrade costs
. Software implementation expenses
04 What is the Pay-As-You-Go pricing model ?
usage af
Ans. :The Pay-As- You-GO pricing model charges organizations based on their actual
cloud resources.
costs ?
0.5 What is operational
well as
Ans. : Operational costs including support for server and network infrastructure, as
staf
storage warranty, data center facilities, existing system administration labor costs and IT
training and turnover.
0.6 What factors should organizations consider when comparing cloud pricing
models ?

Ans. : Organizations should consider factors such as cost, flexibility, predictability and control
when comparing cloud pricing models.
Q.7 What is the benefit of the Pay-As-You-Go pricing model ?
Ans. : The Pay-As-You-Go pricing model alows organizations to pay for cloud services based
on their actual usage, which can be a more cost-effective approach than traditional pricing
models.

Q.8 What are some challenges of cloud pricing models ?

Ans. : Challenges of cloud pricing models include complexity, lack of predictability and
difficulty in managing costs effectively.
Q.9 What is freemium pricing ?
Ans. : Freemium pricing is the practice of ofering a basic set of services for free and enhanced
features and/or content for a fee.
Q.10 What Is subscription pricing ?
Ans. : Subscription pricing is a pricing model where customers pay a recurring fee at regular
intervals, typically monthly or annually, to access a product or service. It allows customers to

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 4-20 Cioud Service Economics
Cloud Senvices Management
exchange for an
subscribe to a vendor's ofterings for a specific period of time in
price. agreed-upon set
Q.11 What is cloud procurement ?
Ans. : Acloud-based procurement system is a fully integrated
solution that streamlines the
procurement teams operate and automate procurement processes. This end-tO-end
in collaboration and data analysis tools eliminate process friction commonly created
system'by s built-way
or disjointed workflows. manual
Q.12 What is CapEx in cloud computing ?
Ans. : CapEx stands for capital expenditure and refers to the cost of purchasing valuable
needed for cloud computing. This includes things like servers, network equipment, storage,assets
and
other IT infrastructure. Examples of CapEx in cloud computing include purchasing a
network equipment, storage and other IT infrastructure. server,
Q.13 Define Opex.
Ans. : OpEx is short for operating expenses, also known as operational expenses and
costs. Operating expenses refer to the money a company spends to run day-to-day operations. operating
Q.14 What is lat-rate pricing model ?
Ans. : In the flat-rate pricing model, customers pay a fixed fee for access to a product or service
for a set period of time. This pricing model is suitable for businesses that offer a product
service that is used consistently over time, such as software or streaming services like Netflix
Q.15 What is cloud sprawl ?
Ans. : Cloud sprawl refers to the uncontrolled growth of cloud resources and is typically the
main cause of cloud billspikes. When companies fail to remove cloud services that are no longer
needed, they continue to pay for them without awareness.

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