Earlier this month I offered my thoughts on cloud commoditization. To recap, as cloud becomes more prevalent, basic cloud services will inevitably start to commoditize i.e. the basic offerings from each service provider will become more similar. As a result, prices and profit margins will reduce.

Only a few weeks later and Data Center Knowledge reports that “cloud pricing wars are on.” Our friends at RightScale say it is seeing aggressive price-cutting on the part of major cloud providers. RightScale says on its blog:

Over the last 14 months, we counted 29 price reductions in cloud services provided by AWS, Google Compute Engine, Windows Azure, and Rackspace Cloud.

The company points to competition as the factor in at least some of the price changes. The problem with this, though, is that price is becoming a point of differentiation, rather than value added cloud services.

Instead of joining the price wars with the enormous market giants, smaller cloud service providers need to understand ways to differentiate. Understanding the following seven points will help:

    1. Identify existing customers
    2. Understand how these customer segment into specific groups
    3. Identify the detailed needs of each segment
    4. Understand existing strengths and weaknesses in existing service offers
    5. Design service offers that create greater value for each segment than those that currently exist
    6. Rapidly configure and launch new service offers
    7. Continuously adapt based on market feedback

By understanding each point, cloud service providers will in turn start to secure new customers by providing greater perceived value and therefore build more defensible positions.

RightScale suggests customers consider all options for price, performance, features, and support:

Price is only one of the factors you need to consider in choosing the right cloud provider. Many enterprises have a portfolio of cloud services, including public and private, to meet the requirements of varied applications. Each cloud provider offers differing combinations of price, performances, features, and support. To get the best value, carefully map your requirements to the cloud providers’ offerings.

Cloud service providers therefore need to understand their value and differentiation in the market to better communicate their differentiated offering to prospects and customers. If done successfully, revenue and higher margins will result.

Cloud service providers will not be able to compete on price in the same way the giants can and the danger of commoditization is too risky. It is time for the cloud service providers to differentiate through value-added services. Doing this will ensure long-term relationships with customers and revenue growth opportunities.

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