A service provider’s guide to on-demand service pricing
The move to providing on-demand services is not just a technical challenge. How do you price them? How do you make sure they don't cannibalize your existing service revenue? There is an answer. In this final post in her series covering on-demand services, Niloufar Tayebi provides several detailed examples of how to price on-demand services.
Niloufar Tayebi is a Senior Advisor in Ciena’s Global Industry Marketing team, focused on helping service providers find new revenue streams from their networks through on-demand and other value-add services.
This is the final entry in a series of blog posts focusing on Bandwidth on Demand (BoD) and on-demand services. Other posts in the series:
- What is Bandwidth on Demand?
- Will the on-demand cloud kill static networks?
- The $9B Market Opportunity for On-Demand Services
The reason many enterprise customers choose on-demand connectivity services has a lot to do with their need for bandwidth and connectivity at the time. Maybe it’s seasonal, a big data transition project, or due to a peak in traffic demand that’s unique to their business vertical. Whatever the reason, the transition to on-demand services has everything to do with flexibility, which is why asking customers to commit to a fixed monthly rate at overprovisioned bandwidth for their connectivity service isn’t the answer to the question of pricing.
Think about on-demand bandwidth as a toll highway. You drive along the road for as long as necessary until you need to exit – at which point, you pay your toll. Because you’re charged as you’re exiting the highway, you only ever pay for the amount of road you used – nothing more, nothing less.
On-Demand pricing models are like toll booths instead of flat taxes. Traditionally, static connectivity services are sold in fixed bandwidth bulks with pricing models that adhere to flat, monthly charges in order to recover expenses and make a profit – which means a predictable price but, generally, a case of over-provisioned bandwidth.
When pricing on-demand services, we need to account for the dynamic and shared nature of the customer’s service request. On-demand networks generally have two segments: the shared network that is used by multiple users (which results in greater network utilization and lower cost-per-bit), and the “last mile” of the network solely dedicated to a single user. These two segments of the network usually meet at an access port, such as a 10G port on the service provider’s metro aggregation switch, which serves as the demarcation point between the shared and dedicated portions of the network.
Therefore, pricing for on-demand services has two elements:
- One related to the dedicated access portion, similar to a network access fee; and
- One related to the shared network, which is either metered or usage-based.
Keeping all of this in mind, we have to ask the question: What’s the best way to meter and charge for on-demand connectivity? Thankfully, there are three kinds of models we can use to price on-demand connectivity services.
- Models that utilize network and control plane solutions keep track of usage in multiple ways, with every event registering through the software application.
- Other models consider pricing connectivity based on the data path, such as price per gigabyte of transferred data, price per hour or minute of connectivity, or price per gigabit per second.
- Some models also consider pricing connection status, so that the rate is per connectivity request or per API call made to an open network.
Most service providers may choose a hybrid model, which charges a monthly fee while supplying usage-based, on-demand bandwidth. Which metering method works best overall, though?
Network Usage & Bandwidth
Derived from the data path model mentioned above, a popular method for pricing on-demand services is to charge based on the network usage time and the bandwidth associated with the connection. For example, on-demand service would be rated as dollars per gigabit per hour and the user would pay based on the duration of the connection at its desired bandwidth. The price per gigabit per hour of a 10G connection would be higher than that of a 1G connection. After all, a higher speed connection can complete the IT tasks faster.
Now that we know our pricing options, the next key question is this: How do we actually determine the price to set per Gbit hour?
The best approach to take here is to ensure that on-demand prices are cost-effective enough for enterprises with low usage profiles to see the value and cost savings of using them, while also ensuring enough of a pricing premium is on these on-demand services that it encourages higher usage profiles to “make the jump” to a higher bandwidth tier. This pricing model is very similar to many retail pricing strategies, where, for example, a single box of tissues is $1 but you can buy 10 in bulk for $8.
At the same time, there needs to be a maximum monthly fee to avoid unpredictable bills. Let’s assume we take a 20-day maximum monthly fee at full rate as the threshold for usage. This means that we can work out the price per Gbit hour at this utilization rate rather than normalizing the price for a fully utilized circuit. If the price for a 10G static line is equivalent to $1 per Gbit hour fully utilized, the price for the on-demand usage-based can become two-thirds more at $1.60 per Gbit hour.
Using this pricing model, an enterprise with a utilization rate lower than 60% utilization would see the benefit of a usage-based price. At a higher utilization, the enterprise would instead see the benefit of upgrading to the 10G full rate service.
In addition to these data-path-related and usage-pricing methods, service providers may consider pricing other elements of flexibility. In an SDN-like environment, the network is open to the end-user to request connectivity directly. A simple way to add value to the network is enabling machine-to-network communication, and pricing the number of API calls to the network that requests connection via a higher-level application and/or machine.
For example, a VMotion application may directly request the connection through an API and the service provider can monetize the interaction between application and network.
Service providers will, ultimately, decide the best way to price on-demand connections based on their own market conditions and objectives. Ciena, through our monetization consulting engagements, brings our insights and expertise to this area with the intent to help service providers define the best pricing structure for their on-demand connectivity offerings.
For even more depth on this topic, download our white paper on Evolving from static to on-demand connectivity services. If you’re ready to transform your network and pricing models to adapt to an on-demand world, then Ciena is ready to help. Contact us today and get on the bandwidth on-demand bandwagon!