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Frameworks, core principles and top case studies for SaaS pricing, learnt and refined over 28+ years of SaaS-monetization experience.
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In today's complex IT landscape, understanding how managed cloud and hosting services are priced has become crucial for enterprise procurement teams. With cloud spending consistently growing—projected to reach $679 billion in 2024 according to Gartner—procurement professionals need to navigate an increasingly complex array of pricing models and service options.
This guide will walk you through the common pricing structures for managed cloud and hosting services, helping you make more informed decisions for your enterprise's needs.
Understanding The Basics: What Are Managed Cloud & Hosting Services?
Before diving into pricing models, let's clarify what these services actually entail. Managed cloud and hosting services refer to outsourced IT management where a third-party provider takes responsibility for maintaining your company's cloud infrastructure and applications.
These services typically include:
- Infrastructure provisioning and maintenance
- Security monitoring and management
- Performance optimization
- Backup and disaster recovery
- Technical support and troubleshooting
- Compliance management
Common Pricing Models For Managed Cloud Services
1. Consumption-Based Pricing
This is perhaps the most prevalent model in the cloud services industry, popularized by major providers like AWS, Microsoft Azure, and Google Cloud Platform.
How it works: You pay for exactly what you use, typically calculated by:
- Compute resources (CPU/memory usage)
- Storage capacity
- Data transfer
- API calls
Advantages for enterprises:
- Alignment of costs with actual usage
- Scalability without upfront commitment
- Transparency in resource allocation
Challenges:
- Potential for cost unpredictability
- Requires sophisticated monitoring to avoid surprises
- May lead to "bill shock" without proper governance
2. Tiered Subscription Models
Many managed service providers (MSPs) offer tiered subscription plans that package different levels of service.
How it works: Services are bundled into tiers (e.g., Basic, Business, Enterprise) with increasing levels of:
- Support availability (8/5, 16/7, 24/7)
- Response time guarantees
- Included services
- Management scope
Advantages for enterprises:
- Predictable monthly costs
- Clear understanding of service levels
- Easier budgeting and forecasting
Challenges:
- Potential for overprovisioning/paying for unused services
- Can be less flexible for changing needs
- May include unnecessary services in higher tiers
3. Resource-Based Pricing
This model ties costs directly to the resources being managed.
How it works: Pricing is calculated based on:
- Number of servers/instances
- Number of databases
- Storage volumes
- Number of applications
Advantages for enterprises:
- Clear correlation between infrastructure size and cost
- Relatively easy to predict as environment grows
- Straightforward to communicate to stakeholders
Challenges:
- May not account for complexity differences
- Can create disincentives for proper architecture
- Doesn't always reflect actual workload
4. Value-Based Pricing
A more sophisticated approach that ties pricing to business outcomes.
How it works: Costs are determined by:
- Performance improvements
- Uptime guarantees
- Business continuity assurances
- Cost savings delivered
Advantages for enterprises:
- Aligns vendor incentives with your business goals
- Potential for higher ROI
- Focuses on outcomes rather than inputs
Challenges:
- Requires clear metrics and measurement
- More complex contracts
- May be harder to compare across providers
5. Hybrid Pricing Models
Many providers now offer customized combinations of the above models.
How it works: Typically combines:
- A base subscription fee
- Variable consumption charges
- Add-on services priced separately
Advantages for enterprises:
- Greater flexibility to match specific needs
- Can optimize for both predictability and efficiency
- Allows for customization without complete custom pricing
Challenges:
- More complex to understand and compare
- Requires deeper analysis during procurement
- May involve multiple billing mechanisms
Hidden Costs To Watch For
When evaluating managed cloud and hosting services, procurement teams should be vigilant about potential hidden costs:
Service Level Agreement (SLA) Penalties
What happens if the provider fails to meet their guaranteed service levels? According to a study by the Ponemon Institute, the average cost of downtime is $9,000 per minute for enterprises.
What to look for:
- Are there meaningful financial penalties for missed SLAs?
- Do the SLAs match your actual business requirements?
- Is the process for claiming SLA violations straightforward?
Exit Costs
Transitioning away from a managed service provider can sometimes be surprisingly expensive.
What to look for:
- Data export fees
- Early termination charges
- Transition assistance costs
- Intellectual property restrictions
Professional Services Fees
Implementation, migration, and customization often incur additional fees beyond the regular service charges.
What to look for:
- Onboarding and implementation costs
- Custom development rates
- Integration work
- Training expenses
Procurement Best Practices
To optimize your managed cloud and hosting service procurement process:
1. Align Pricing Models With Business Objectives
Choose pricing structures that match your organizational priorities:
- If cost predictability is crucial, tiered subscriptions might be best
- If maximizing efficiency is the goal, consumption-based models make sense
- If your workloads are highly variable, hybrid models offer flexibility
2. Negotiate Effectively
According to Flexera's 2023 State of the Cloud Report, organizations waste approximately 30% of their cloud spend. Effective negotiation can help reduce this waste.
Key negotiation points:
- Volume discounts
- Committed use discounts for stable workloads
- Custom SLAs that match your actual needs
- Price caps or predictability mechanisms
- Transition and exit terms
3. Implement Strong Governance
Even the best pricing model requires oversight:
- Establish clear approval workflows for service changes
- Implement tagging and cost allocation structures
- Set up alerts for unusual spending patterns
- Conduct regular service reviews with providers
4. Consider Total Cost of Ownership
Look beyond the monthly invoice to understand:
- Internal management overhead
- Integration costs with existing systems
- Security and compliance implications
- Opportunity costs of alternative approaches
Case Study: Enterprise Approaches To Managed Cloud Pricing
A 2022 survey by Deloitte found that companies taking a strategic approach to cloud procurement saved an average of 21% compared to those with ad hoc processes.
For example, a global financial services firm shifted from a resource-based pricing model to a hybrid model with:
- A base subscription for core infrastructure
- Consumption-based pricing for variable workloads
- Value-based components for mission-critical applications
This approach resulted in a 17% cost reduction while improving service levels and increasing flexibility.
Conclusion: Finding The Right Fit For Your Enterprise
There is no universal "best" pricing model for managed cloud and hosting services—the optimal approach depends on your organization's specific needs, workload characteristics, and business priorities.
Effective procurement requires:
- A clear understanding of available pricing models
- Alignment with business objectives and IT strategy
- Careful attention to contract terms and SLAs
- Strong governance and monitoring
By approaching managed cloud service procurement strategically and understanding the nuances of different pricing models, enterprise procurement teams can secure better value, greater predictability, and more effective services for their organizations.
Remember that the lowest price doesn't always represent the best value. The right managed cloud services provider should align with your business objectives while providing the flexibility, security, and performance your enterprise requires.