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/ 11 Feb 2015

Cloud Computing: Charging for SaaS Article 2 of 4

Pricing models for ongoing cloud computing services will typically follow one of two models as follows:

1. Periodic charging (monthly, quarterly or yearly): This is probably the most common model and usually involves a set subscription fee based on the number of users and an overall or per-user storage limit. This offers a degree of certainty and the basic package is often sold cheap or provided for free, with service providers making most of their profit from the “upselling” of add-ons and premium packages.
2. Usage-based charging: This relates the charges to be paid for the amount of usage made of the service by the customer. This can be attractive to customers in being able to manage and minimise usage; and, unattractive to service providers who risk uncertainty due to fluctuations from one charging period to the next on a basis that is beyond its control.

Additional charges may also come about and the parties must be clear on what these are or what these might be from the start. They include:

Support & Maintenance: This is often introduced and made available at an additional charge based on a percentage of the subscription fee and these percentages vary between service providers. Premium maintenance might also be an option as well as so-called “uptime guarantees”.
Extra Users: This can be an add-on charge and can vary greatly.

Unlike traditional software licences wherein the actual prices paid are perceived to be heavily discounted in practice, service providers with cloud computing offerings have usually had to strip their standard prices significantly in order to overcome market hesitancy. Discounts are commonly found more so around the add-ons.

It is oft the case that many cloud service providers are actually keen start-up companies who are happy to forego immediate gratification in order to obtain market share by way of pricing services in a highly attractive and competitive way in favour of potential customers. This is fine and should not affect the ability for the parties to fairly contract and for a long time. However, a key concern for a customer who has agreed to a an advantageous initial price will be that this price doesn’t escalate inordinately over the term of the contract or that the service provider is only willing to enter into a new contract at the end of the initial shorter term contract on the condition that the charges increase significantly.

The parties should take the time to ensure that longer-term agreements spell out what price increases can and cannot be permitted under the contract. There are different ways to restrict price increases that can work for both parties. For example, increases can be capped either by reference to:
a. a fixed percentage of the charges paid in the preceding year; or,
b. an indexation mechanism such as the consumer price index (CPI); or,
c. to IT-specific indices.

Similarly, for short-term contracts, the parties should seek to negotiate options to renew and what shall determine any price increases applicable to any renewal terms. Note that if a provider decides to escalate their charges excessively, a customer may well be able to simply move to a different provider anyway without being liable on the current contract if provider is deemed to be acting unreasonable.

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