by Klaus Ehmke
The Cloud Computing service model, boarding (SaaS – Software as a Service, PaaS – Platform as a Service, IaaS – Infrastructure as a Service) it is challenging IT companies pricing departments. It is a great sales model that may increase sales of services and recurring service contracts, but requires an experienced pricing department.
The right level of equilibrium at those many pricing assumptions will determine whether you win or lose the contract against competitors and will avoid future negative surprises. Some examples are:
- Availability of Capital and or funding
– The initial
investment (“CAPEX” – Capital Investment), that all your customers
wants to avoid now it is on your companies hands. Tech companies must have available
cash or bank funding to finance clients’ infrastructure investments. Small & Medium companies will probably be
out of big contracts per lack of funds to finance the required contract
- Contract term – Contract term significant
influences the final price. A 5-year contract is going to dilute investments in
60 months, and of course, the monthly price is lower than a 3-year contract for
- Termination Fee – Obviously, the contract term
impacts on the final price, as mentioned above, but a long-term contract
without a penalty for early cancellation, covering all investments may results
in significant losses in case of early termination. Determining the right penalty
for early termination is a major challenge in the Cloud Computing model.
- Hardware lifetime – The useful life of the hardware supplied
in the contract is a determining factor in the pricing. In trying to win, the
contract is a great temptation to include an additional year in the life of the
hardware, but if you need a refreshment before the end of its useful life, for
sure your company is going to face a contract margin reduction.
- Shared Infrastructure – A basic principle of Cloud
Computing is to share the infrastructure and this is another challenge in
defining the price. How to make the correct apportionment of shared
infrastructure? Who pays the idle infrastructure? How idle infra should be
included in the price of each contract? In summary, another variable that can
make final prices go lower, but may end up in significant losses if erroneously
- Cost of Capital – What is the cost of capital to be
considered in the price? As contracts tend to be long-term, Tech companies must
estimate the future rate of interest, consider the average rate of its capital
funding, consider the country risk, inflation, etc (basically “WAAC”).
A few percentage points of difference in the estimate interest rate may
determine a lower price to win the bid, but can also end up in future losses.
a project there is always a dilemma: be more aggressive on some assumptions to
have a more competitive price and win the contract, or be conservative, reduce
risk and run the risk of lose the contract to your competitor. How to balance this
dilemma it is the big challenge.
solutions in the new Cloud Computing model is becoming a financial challenge
more complex than the technological challenge, and requires attention because
the great contract closed today may became a big financial problem of tomorrow.
and Director of Akurat Consultoria
Executive at Technology companies
member of IBGC