Pricing Models for On-Demand Computing

Abstract

On-demand computing provides a new way for companies to manage and use their ITinfrastructure. This model of corporate computing radically changes the way companies pay for theirIT infrastructure, basing it on "pay per use" rather than on the fixed infrastructure investments suchcompanies are accustomed to. A clear theoretical understanding of pricing on-demand computingis thus central to the viability and growth of this nascent industry. We contribute towards such anunderstanding in this paper by modeling the optimal pricing of on-demand computing while takingfour critical factors into account: the costs of deploying IT in-house, the business value of this IT,the scale of the provider’s on-demand computing infrastructure, and the variable costs of providingon-demand computing. Three distinct pricing models emerge as optimal among all possible pricingfunctions for on-demand computing. These models describe when volume discounting, free usageand demand caps should be used to manage demand appropriately and profitably. We also outlinea likely path that the transformation towards on-demand computing will follow â€" under which low-usagecustomers are targeted initially, followed by a broadening of the market, and finally, a focus onprofiting from inducing adoption by high-usage customers â€" and prescribe how the associated pricingmodels should evolve appropriately.