Pricing Strategy for Cloud Computing Services · 2015. 7. 29. · 14 Modeling reserved and spot cloud services – k stage timeline • After introducing spot service: –Reserved

Pricing Strategy for Cloud

Computing Services

Presented by:

Huang Jianhui

2

2011

$91.4 b

2012

$111 b

2016

$206.6 b

:

3

Fixed Pricing

Usage-based Pricing

Usage-based

Dynamic

Pricing

Usage-based

Fixed

Pricing

List price

4

2006

2011

On demand:

Usage pricing

Reserved:

Upfront fee + usage pricing

Spot:

Usage pricing, dynamic

Burst (usage) pricing, dynamic

Subscription

2009

2012

Usage pricing in seconds Micro-Mobile-Plan

Problem: Uncertainty

• Various pricing mechanisms


5

• Various pricing mechanisms are changing

Source: Agmon Ben-Yehuda, O., Ben-Yehuda, M., Schuster, A., and Tsafrir, D. (2011). Deconstructing

Amazon EC2 spot instance pricing.


6

• Various service specifications

Consequence

7

Misalignment between business goals and use of

cloud computing services

Research Questions

1) What are the major types of pricing methods currently

used by cloud services vendors?

2) What are the key factors that should be considered in

pricing cloud computing services?

3) Why should a cloud services vendor be interested in

multiple pricing approaches? Related to this, how should

Amazon’s EC2 mixed pricing strategy, with both fixed

reserve pricing and dynamic spot pricing, be evaluated?

4) What are the key variables that will affect clients’

valuation of cloud services? How will they affect clients’

willingness-to-pay for customized cloud services?

8

9

Research Model

Essay 1

Essay 3 Essay 2

General Price Formula

for

Cloud Services

Standard

Cloud Services

Customized

Cloud Services

Analysis of

Different Pricing Channels

Examining

Customers Willingness-to-

Pay for the

Customized Cloud Service

Market Survey of

Pricing Practices

Essays

1) Modeling reserved and spot cloud services

2) A pricing experiment for cloud services

3) Pricing practices in the cloud computing

services market

10

Modeling reserved and spot cloud

services

• What I do

– Provide new knowledge

Analysis of fixed price reserved cloud computing

services versus spot price services

11

• How I do

– Analytical modeling and simulation

• One vendor

• Many clients with job arrivals (𝜆1, 𝜆2, 𝜆3…)

• Job value uniformly distributed in the range of [vL, vH]

• Two services: reserved and spot

• Fixed price for reserved service

– Reserved contract (T, N)

• Dynamic price for spot service

– Spot price • Two price levels: low price and high price (pL, pH)

• Each price is associated with a probability (θL, θH)

• k stages, spot price refreshes in each stage

• Clients’ sensitivity to service interruption: γ

12


services – model settings

Buy reserved contract (T, N) or not

In-between stages:

task submission

1 k Time

…… 2 3 4 5 6 7 8 9 10 k-2 k-1

ps changes

λi λi λi λi λi λi λi λi λi λi λi λi

On Spot

Reserved


services – k stage timeline

14


services – k stage timeline

• After introducing spot service:

– Reserved contract price decreases

• The reduction of price decreases in γ

– Market share of reserved service decreases

• The reduction of market share is convex in θL • The reduction of market share decreases in γ

• The reduction of market share is larger when the price ratio

pH /pL is larger.

– Vendor’s total profit increases in γ

– For the vendor, optimal θL increases in γ

– Condition for a higher vendor profit: pH /pL is small and pH is close to the expected job value.

A pricing experiment for cloud

services

15

• What I do

– Investigate factors affecting clients’ willingness-to-pay

for a customized cloud computing services

Customization of cloud computing services is related

to the level of risk of service interruption

• How I do

– Experimental work and econometric modeling

16

Basic empirical model:

WTPi,j = β1PriceReserved + β2PriceSpot + β3RiskScorei + β4RiskInfoi + β5TaskDurationj + ε


services

17

Occurre

nce

Total

Payment

Expected

Profit

On-demand

Job completed 100% $240.0

($0.80 X 300) $760.0

Job not

completed 0% N/A N/A

Spot

(Statistics of Historical

Purchases)

Job completed 98.9% $87.74 $912.26

Job not

completed 1.1% N/A $184.44

Risk analysis support


services

*finish the task: $1000 rewards

*failed to finish the task: $200 penalty

18


services


services - Experiment Workflow

19

Login Quiz Read Informed Consent Form

Task 1 Task 2 Task 3

Questionnaire

Risk

Propensity

Measurement

One week later

http://cloudpricingstudy.appspot.com/exp

Task 1: 3 hours, 100 instances



• Risk analysis support significantly increases participants’

willingness-to-pay.

20


services – Preliminary findings

• Interaction effects (risk analysis support and job risk, risk

analysis support and participants’ risk propensity) are

uncertain.

Pricing practices in the cloud

computing services market

21

• What I do

– Study the macro-structure of pricing practices in the

cloud computing services market

A general pricing framework for cloud computing

services market

• How I do

– Market survey of pricing mechanisms implemented by

representative cloud computing services vendors

22



• Criteria for selection of cloud computing services

vendors

– The vendor must make pricing information on all its

services available on its official web site

– The vendor must have been selected at least once for

review in Gartner’s Magic Quadrant Report

• 18 cloud services vendors, 29 different types of services

23

Category Factor Definition Unit

Usage

Service Type Services specifications (OS, size, location, etc.) Categorical

Unit Price Unit price of usage $ / Unit

Total Usage In units of usage Units

Reservation Reservation Period

Tength of period that the service is exclusively

reserved for the client’s use Hours

Reservation Fee One-time advance fee for reserved services $

Technical

Support

Support Type Characteristics of technical support Categorical

Support Charge Periodic payment for technical support $

Penalty

Total Outage Length of service down time Hours

Compensation Monetary penalty for vendor not fulfilling the

promised level of service quality $



25

Variable Name Definition

T Fixed price for reserved services contract

N Resource capacity of reserved services contract

v Value of a single job

vL Lower bound of job value

vH Upper bound of job value

θL Probability of low spot price

θH Probability of high spot price, θH = 1 - θL

pL Low spot price

pH High spot price

γ Clients’ sensitivity coefficient to services interruption

λi Job arrival rate of client i

𝜆 Maximum job arrival rate of a client

26

N Range Minimum Maximum Mean Std. Deviation Statistic Statistic Statistic Statistic Statistic Statistic

Risk Propensity 45 40 -20 20 0.07 8.56

Age 45 26 24 50 34.40 6.14

Working Experience 45 5 1 6 2.76 1.26

Decision Making Experience 45 3 1 4 1.44 0.73

Cloud Services Usage Experience 45 3 1 4 1.80 0.84

Negotiation Experience 45 4 1 5 2.02 0.99

Analytics Experience 45 3 1 4 1.27 0.62

Pricing information goods

27

Etzion, H., Pinker, E., and Seidmann, A. (2006). Analyzing the simultaneous use of auctions and

posted prices for online selling. Manufacturing and Service Operations Management, 8(1),

68-91.

Fishburn, Peter C., Andrew M. O., and Ryan C. S. (2000). Fixed fee versus unit pricing for

information goods: competition, equilibria, and price wars. In D. Hurley, B. Kahin, and H.

Varian (eds.), Internet Publishing and Beyond: The Economics of Digital Information and

Intellectual Property, 167-189, MIT Press, Boston, MA.

Sridhar, B., Bhattacharya, S., and Krishnan, V. (2009). Pricing information goods: A strategic

analysis of the selling and on-demand pricing mechanisms. Working paper, Smeal College of

Business, Pennsylvania State University, College Park, PA.

Sundararajan, A. (2004). Nonlinear pricing of information goods. Mgmt. Sci., 50(12), 1660-1673.

Varian, H. R. (1995). Pricing information goods. In Proceedings of Scholarship in the New

Information Environment Symposium, Harvard Law School, Boston, MA.

Documents

Pricing Strategy for Cloud Computing Services · 2015. 7. 29. · 14 Modeling reserved and spot cloud services – k stage timeline • After introducing spot service: –Reserved