Cloud computing pricing: Beware the bill shock

Cloud services have many advantages, and can save your organisation money -- but there are also potential pitfalls and additional costs to watch out for.
Written by Danny Palmer, Senior Writer
cloud computing

Do you really know what you're paying for when it comes to your cloud package?

Image: Getty Images/iStockphoto

One of the benefits of cloud computing that's often touted by providers is cutting costs: rather than having the hassle and expense of buying servers and equipping data centers, and paying for staff to maintain them, companies can offload their workloads to the cloud, where economies of scale around the infrastructure mean that costs are much lower.

In theory, cloud users simply pay for the resources they use, as and when they need them, without the burden of paying for hardware, or data center space. That means pricing should be straightforward, right?

Not quite: there isn't just a single model of cloud pricing.

Cloud pricing models

On-demand allows you to purchase services as and when you need them, while reserved instances work like many other types of bill, where the user forecasts what they're probably going to need over a particular period -- usually in quarterly or annual instances. The user then pays upfront, although their cloud provider may give discounts for buying services in bulk. Spot pricing is where cloud companies sell off unused processing power at a discount: companies can then bid for a certain amount of computing power at a certain price.

Google represents the closest option to pure cloud, says Dave Bartoletti, principal analyst at Forrester. "With Google, you really just pay for what you use, and you get more discounts the more you use," he says, adding that Amazon and Microsoft have a "slightly different approach" that veers more towards reserved instances.

But while their pricing methods may vary, one thing Google, Amazon, and Microsoft do have in common is a desire to drive down the cost of services, which has led to a price war between these major cloud companies.

But while the three firms are still competing on cost, the race to the bottom has somewhat slowed.

"What's not happening so much any more is the constant battle for discounting on list prices that we saw over the last five or six years. That's because these platforms are maturing -- those prices have come down significantly over the past couple of years," says Bartoletti.

That's where cloud pricing can get tricky, because while it may be that you've signed up for a limited set of cloud services to start with, you may later find that there are additional costs to be paid. So despite initial low costs, bills can rise rapidly for the unwary.

"It's very common for companies in the move to cloud to open the floodgates, let people set up their own accounts, start building and testing things. Then soon you get your first 'shock bill' -- just like your first mobile phone bill," says Bartoletti, likening it to the charges for going over your mobile data allowance.

"Because each individual cost looks cheap until you start using them all the time, cloud looks cheap until you use it all the time -- then it gets expensive. The real powerful benefit of cloud economics is not paying for it when you're not using it," he adds.

But there are simple ways to attempt to manage cloud services, such as turning them off when they're not being used, but in order for that to work effectively "it requires someone whose job that is to monitor that," he says.

There's also a further additional cost you may incur as time goes on, especially if your organisation is using cloud for pure storage -- because as more data is created, more is stored, and the costs associated with that storage will rise.

"It's a bit of a cash cow because you're only going to use more and more of it as time goes on -- it's a lovely, constantly-reoccurring revenue, which also has a degree of locking-in because it's not easy to get out of," says Owen Rogers, research director at 451 Research.

There are other hidden costs too: "Another thing is getting data into the cloud is free but you have to pay to get the data back, so that's almost a tax on removing your data," says Rogers, something which providers do tactically to ensure continued custom.


It's not just hardware that organisations are turning to the cloud to provide: they're increasingly using software-as-a-service (SaaS) packages to access everything from office suites to sales force automation and HR applications.

Analysts predict that software companies currently offering perpetual licences will increasingly swap these to a SaaS basis: analyst IDC predicts software subscription revenue will reach $130bn in 2016, a 21 percent increase over 2015.

That could be good news, as it may encourage special offers and bundles: these software companies want to show that their SaaS businesses are growing, which could mean good deals -- at least in the short term.

Pricing comes down to usage parameters: the more people using a tool, the more the organisation will be charged, but the cost of entry tends to be low in order to encourage adoption. In time, however, a healthy customer base will deliver a consistent monthly recurring revenue.

For some cloud providers, this can come at a short-term cost as they take on more customers by offering low prices to new customers, gambling on the fact that in future, demand will increase and revenue will rise.

Organisations looking to deploy SaaS applications should therefore be sure that they know what they're buying, pushing those selling on their service-level agreements (SLAs) when necessary. These are often buried deep in the providers' websites, but it's important to make sure that they match not only your technical requirements but also your business needs.

The system does provide benefits -- customers can increase demand for apps during peak demand and lower it or turn it off during troughs. But if you're using constantly more resources than you expected, then the cost won't necessarily be cheaper than if you were deploying in-house apps -- that's certainly something to consider if you've not yet made the leap to cloud.

Analysts warn that the complexity of software licencing encourages to companies to buy more than they need in order to make sure they're covered: as SaaS is at least a little more transparent and easy to understand, which may help firms cut their licencing costs.

So what's the future of cloud pricing? There's been a cooling in the battle between the big names, but they're still going to be competing for customers -- Microsoft, for example, has recently added machine learning features to its Office cloud apps, while Google is pushing for more video in the cloud.

Ultimately, this competition is going to be good for the consumer -- so long as one firm doesn't completely dominate. "These guys are retailers who'll drive down the prices. But we don't see a market dominated by a single provider, so it's not a monopoly yet. There's a few of these guys around who will keep each other honest," says Tiny Haynes, research director at Gartner.

Read more on cloud computing

Editorial standards