Cloudonomics: The Business Value of Cloud Computing, + Website

Variable Penalty Functions

We have kept things simple by assuming that the opportunity cost of a missed customer stays constant, regardless of the number of customers whose demand is ignored, and that the cost of resources is the same, regardless of how many aren’t used.

If only the real world were that simple, but of course it’s not. If there’s one customer who can’t get through to your Web site or one employee who can’t get online to your internal application, it may be their problem. If there are 10 or 100, it’s a serious problem, and if there are 10,000, it’s a public relations nightmare. Conversely, being a little over on capacity is inefficient, but being a lot over can cause the corporation to miss earnings targets, the stock to plummet, a takeover to ensue, and regrets to arise that we hadn’t studied the equations just presented more carefully.

There are also other ways to consider what happens when there is excess demand. Rather than a penalty function based on the excess and the assumption that the unserved demand is lost, the unserved demand can be delayed until later. This delay has a cost to the customer that is application dependent. Moreover, the cost in this case is related to the delay, but the delay is related to the quantity of overage and the subsequent demand. If demand levels immediately following the overage are high, the delay may be pushed out for a long time: This is the three-hour wait for a dinner table at a popular restaurant. However, if the demand ...