Cloudonomics: The Business Value of Cloud Computing, + Website

Pricing

Many cloud services are characterized by pay-per-use pricing, but such a pricing model is far from the only possible model, even in today’s cloud. Many cloud services are advertiser supported, and Wikipedia is “pay-what-you-like,” which may include nothing. One lesson that can be drawn from other industries is that innovation applies not only to products and services but to how they are priced: Both the product and its pricing are key elements of the marketing mix. And today, we’ve moved beyond competition just on price to competition on pricing.

America Online caused Internet usage to triple by eliminating per-minute dial-up rates in favor of unlimited usage in 1996.1 Similarly, AT&T Wireless Services introduced Digital One Rate in 1998—moving from pay-per-use to essentially flat rate—and then in 2011 migrated from unlimited usage to usage-sensitive plans.2

There are dozens of pricing strategies, each with its own business model and customer acceptance implications. “Free” causes a unique human behavioral response, where consumers will select free goods even when they are a worse value.3 Moreover, “free” and “profitable” are not mutually exclusive terms. As Harvard Law School professor Yochai Benkler observed in describing the economics of commons-based peer production, even though IBM has tens of thousands of patents, its Linux-related services revenues grew from zero to over $1 billion in less than two years, surpassing income from their intellectual property.4 Google ...