Demystifying Cloud Pricing

Cloud services can be confusing when it comes to costs. The most important question customers have is: “How much will this cost me?” To answer that, you first need to understand pricing. Every product and service has a price. The price is what you pay for a specific service or product. Cost refers to how much you actually end up paying based on how much of the product you use. While you usually know the price upfront, you may not fully understand what makes up that price and how it can change. By familiarizing yourself with the cloud pricing models, you can identify areas to optimize your spend by understanding how each product impacts your spend. In this blog, we’ll shed some light on the cloud pricing models that apply to all major cloud service providers (CSPs), not just Google Cloud, and how you can use these insights to understand more about how you’re using your cloud platform.

What is price?

Price is the rate at which you are charged for a product and/or service. It is, in fact, applied to a Stock Keeping Unit (SKU) which is the most basic unit of what you are buying. It is not to be confused with Cost which is a function of Consumption x Price.

There are two main types of prices applied to a SKU — list price and contracted/custom price. List price is the base price for a product or service and includes any basic level of discount that can be applied. Contracted/Custom price, on the other hand, is specific to you and your organization and includes any negotiated discounts and/or credits. Both types have specific pricing models that evolve over time to suit the market and business needs.

Multiple factors influence cloud pricing, such as:

• Type of product or service - Infrastructure, platforms, and software have different pricing.
• Business model - On-demand, reserved, or spot pricing.
• Market conditions - Prices change based on competition and customer demand.
• Level of engagement - Larger commitments can unlock competitive pricing and discounts.

Understanding pricing models and the factors that shape them can help you optimize your cloud spending and make the best choices for your needs. With some knowledge, the costs of cloud services become much clearer.

General pricing models

Below, we have covered some of the most commonly occurring pricing models that are generally used to price Cloud products and services, by CSPs. Many more pricing models may exist beyond this list, as per the business model employed by the provider.

1. Time-based pricing: The simplest form of pricing is based on time. The most commonly used ones are fixed prices (prices that rarely change over time such as monthly fixed subscription fee) and floating prices (prices that rapidly change over time based on some condition; eg. spot pricing for Compute and Storage based on market demand).

2. Unit-based pricing: Some pricing is based on some unit such as time, storage, usage, spend or even number of users. Examples include:
a. Pricing a SKU based on its own resource usage and/or spend
b. Pricing a SKU based on some other SKU’s resource usage and/or spend (e.g premium support for Compute priced at 5% of total spend on Compute products)
c. Pricing a SKU based on another SKU’s price.
d. Pricing a subscription based on the number of users or seats.

3. Carbon pricing: A more recent, but equally important, metric includes SKU pricing that is implemented through a tax indexed on CO2 emitted through usage.

4. Aggregated pricing: This includes pricing a SKU based on its inclusion in a group such as product solution, workload, SKU groups, region etc.

5. Tier-based pricing: This is not really a pricing model but a mechanism that can be applied to any of the pricing models above. It may include (not limited to) - Usage based tiers (eg. free for first XX units of usage), Time-based tiers (eg. free for the first month of usage) and Spend-based tiers (eg. $XX for the first $10K of usage).

However, CSPs can also choose to employ their own models based on their unique product and service. What converts a list price into a custom or contracted price, is the layering of specific types of discounts and credits to the base price mechanics. Discounts lower the unit price, while credits give you money back, either as cash or by reducing your total bill. However, there is some commonality between the two in terms of the scope and parameters that they are based on, in addition to the provisioning method.

1. Scope: Discounts and credits can be based on some predefined scope such as a single SKU, inclusion of a SKU in a workload or SKU group or a specific folder/project/billing account.

2. Parameters: Within a predefined scope, discounts and credits can be based on a specific parameter such as time, spend or usage. It could also be based on a combination of these parameters such as:
a. Time and Usage eg. “Get $300 credits on Compute engine workloads for the first month of usage” or “Save up to 50% with committed use discounts, over 3 years, on Compute engine resources at your billing account level” OR
b. Time and Spend eg. “Get $5K credits for $20K of spend on virtual machines by 12/31/2023.

3. Provisioning: Discounts and credits can be provisioned in multiple ways, including:
a. Fixed manner (eg. flat rate or amount)
b. Floating manner (eg. discounts and credits that rapidly change over time based on specific conditions).
c. When additional parameters exist, such as FX rates, the pricing model can be impacted (eg. fixed FX rate through the course of your contract).

The options listed above are just a few examples. Cloud providers are constantly coming up with new discount and credit programs based on what their business needs and what their customers want. So the specifics of these deals may look different over time or from company to company.

But the overall goal remains the same: to attract new customers and keep existing ones happy.

How can you use this information?

Though this blog explains commonly used cloud pricing models, you likely won’t see it in your invoices or cost reports. You may spot your SKU price, discount amount and discount type, but the exact pricing model remains invisible. Still, knowing how pricing works, will allow you to better understand which price model works best for your business. This will provide you an opportunity to now choose your products and services not just on usage but also pricing. While invoices don’t spell out the pricing model, you now know enough to make smarter, more cost-effective choices in the cloud. Pricing education leads to purchasing power.

Google Cloud pricing

In Google Cloud, we strive to take a transparent and innovative approach to pricing. We tailor our pricing mechanics to help you gain the most value from your Google Cloud investment. We offer tools, such as the Pricing API, to provide complete visibility into your pricing and discounts. Check out our previous blog post on using the Pricing API for an effective price and cost analysis. If you are new to Google Cloud and want to understand our prices better, head over to our Google Cloud Pricing page to request a custom quote and discover more about our products and their pricing.