L9: Pricing Models and Modeling TCO

Pricing Models

Defines unit cost of resource usage according to usage cost metrics
Factors influencing price model
1. overhead in design, development, deployment and operation of cloud services and other IT resources
2. opportunities to reduce expenses via IT resource sharing and data center optimization
3. market competition and regulatory requirements

Variables in a Pricing Model

Cost metrics and associated prices → depends on on-demand (pay-per-use) or reserved allocation (upfront fee + discounted hourly rate)
Definition of fixed (usage quota) and variable (actual usage) rates
Discounts for higher volumes
Payment options and schedules: customization, prepaid, postpaid, instalment

Example:

IaaS: pricing based on resource allocation and usage including amount of network data transferred, number of virtual servers, allocated storage capacity
PaaS: price also depends on software configurations, development tools and licensing fees
SaaS: price is determined by number of application modules in the subscription, number of nominated cloud service consumers, number of transactions

Example: AWS EC2

Types:
1. General purposes: t2, m4
2. Compute optimizedL c3, c4
3. Memory optimized: x1, r3
4. Storage optimized: i3, d2
5. Accelerated computing: p2
Sizes: Each instance type is further divided into subtypes based on the number of vCPUs and memory availability
- E.g: nano(1), micro(1), small(1), medium(2), large(2), xlarge(4), 2xlarge(8), 4xlarge(16), 10xlarge(40), 16xlarge(64)

AWS SLA: AWS SLA

SaaS: Integrated Pricing Model

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Cloud consumer leases a SaaS product from Cloud Provider A. Cloud Provider A leases an IaaS environment (including the virtual server used to host the cloud service) from Cloud Provider B.
Cloud consumer pays Cloud Provider A for providing the SaaS Cloud Provider A hosts the SaaS on Cloud Provider B and pays Cloud Provider B for the IaaS service

SaaS: Separate Pricing Model

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Cloud consumer leases a virtual server from Cloud Provider B (IaaS) to host the SaaS service from Cloud Provider A (SaaS). Both leasing agreements may have been arranged for the cloud consumer by Cloud Provider A.
There may still be some fees billed directly by Cloud Provider B to Cloud Provider A

Example: AWS Pricing

Charges differ across region and depends on the perating costs (energy, communication and maintenance)
On-demand
- multi-tenancy, pay by the second (minimum of 60 seconds)
- start and stop as you wish
Reserved
- pay by the year - onetime upfront + pay as you go
- 3 types: light, medium and heavy utilization
- start or stop as needed
Spot
- Bid for unused capacity
- Name your spot price and if market rate is less than your bid, you get the instance
- Instance automatically terminates if your spot price becomes less than current market rate
Dedicated
- Instance runs in a VPC on hardware dedicated to a single customer
- Instances are physically isolated at the host hardware level from instances that belong to other AS accounts

Cost Metrics

Financial analysis of cloud adoption
Compare on-prem (total cost of ownership TCO) and cloud-based provisioning )utility-centric pay-per-use)
Usage scenario
- Cloud consumer
- Cloud provider:
  - private cloud - determine resource charging within an organization (IaaS)
  - how to price a cloud service (SaaS), etc

Business Cost Metrics

Upfront costs:

Capital expenses (Capex)
Initial investment to fund IT resourcess
Obtain resource, deploy and administer
on-prem → high: hardware, software and deployment costs
cloud-based → low: labor cost for setting up cloud environment

On-going costs:

Operational expenses (Opex)
Run and maintain IT resources: licensing fee, electricity, maintenance
Higher for on-prem

Additional costs:

Cost of capital
- Cost incurred to raise funds → if high, leasing cloud-based is justified
Sunk costs
- Prior investment on existing IT resources
- If significant, cannot justify cloud-based
Integration costs
- Effort needed to interoperate IT resources on new environment, e.g. new cloud platform
- High cost → cloud-based less appealing
Locked-in costs
- Movement from 1 cloud provider to another
- high value → cloud-based less appealing

Cloud Usage Cost Metrics

Network usage (data transfer): inbound, outbound and intra-cloud network traffic
- Total network traffic in bytes
- Accumulated over a pre-defined period, e.g. up to 1GB free, S$0.01/GB till 1TB and S$0.005/GB after 1TB per month
- Applicable to IaaS, PaaS, SaaS
- Inter-cloud:
  - Data replication, synchronization, …
  - May have different rates for inbound and outbound. Some providers may not charge for inbound
- Intra-cloud: Some provider may not charge for it
Server usage (compute): on-demand and reserved VM allocation
- range of performance attributes: CPU, RAM, dedicated storage, …
- On-demand
  - pay-per-use fee short term
  - cumulative from server start to stop date
  - IaaS, PaaS
- Reserved
  - upfront cost for reservation
  - start date to expiry date
  - costs: daily/monthly/yearly
  - IaaS, PaaS
Cloud storage device (storage): on-demand storage allocation, I/O data transfers
- On-demand storage space
  - size of storage space in bytes
  - cumulative sum over date of allocation to release
  - IaaS, PaaS, SaaS
- I/O data tranferred metric
  - I/O data in bytes
  - some providers may not charge (IaaS, PaaS)
Cloud service (service): subscription duration, number of users, number of transactions
- SaaS
- application subscription duration: cumulative sum from subscription start to expiry date
- number of nominated users, e.g. S$0.9/additional user per month
- number of transactions
  - number of request response message exchanges, e.g. S$0.05 per 1000 transactions
  - SaaS and PaaS

Total Cost of Ownership of a Datacenter

Capex = upfront investment depreciated over a certain timeframe such as construction cost of datacenter and purchase price of servers

Opex = recurring cost of running datacenter such as electricity costs, repairs and maintenance, salaries, etc