Cloud Billing Models: Consumption-Based Billing Versus Level Billing

Types of Cloud Billing Models

Saving money is often the number one reason organizations migrate their on-premise infrastructure to the cloud. When done correctly, many enjoy that benefit, often due to economies of scale. That’s not all; the cloud, or a managed services provider, allows them to turn ugly capital expenses (CAPEX) into CFO-friendly operating expenses (OPEX). No longer does the balance sheet take a huge, one-time, CAPEX hit; instead, cloud services offer a monthly “cost of doing business” OPEX—which is much preferred. But when choosing services, which billing method is right for you?

Consumption-Based Billing

If you’ve ever paid an electric bill, you know the deal. You pay more for A/C in the summer months, and more for heat in the winter months. It’s all about your usage. Consumption-based billing models follow this concept, in which, you pay for your usage each month. This may allow for smaller organizations to adopt new technology without a significant up-front investment; it may also be ideal for those without analytics that are unsure of what their cloud capacity needs will be. Of course, this strategy could cost them money if they’re too unaware.

According to Dr. Jonathan Koomey, an IT Consulting Professor at Stanford University, companies are wasting $62 billion per year paying for cloud capacity they don’t need. Many companies have over 80% more server capacity than needed on-premise, and moving this data to a large cloud provider means they wind up paying a third-party for electricity, cooling, licensing, and maintenance on unused cloud capacity. So, it’s imperative to unload or delete unnecessary data before migration.

That’s not the only challenge with a consumption-based billing model. There could also be the issue of the “noisy neighbor.” If you’re not using a lot of resources, a provider may allot them to someone else (why not?). But, issues may occur if your resources are required, and someone else is using up the capacity you need to service your requests. Now, not only will performance be slow, but it could shut down some applications, which are vital to your organizations to do business.

When taking on a consumption-based billing model, organizations should understand their needs. It should be noted that this model can be ideal for seasonally-based companies–those that may only experience a spike a few times per year. They will pay less in the off-season, but need to be prepared for a larger bill when business is booming. They also know when their consumption is low, and others sharing their resources won’t pose a threat.


Level Billing

Having full control over the financial costs and performance of services is vital to many organizations, especially government agencies. These organizations don’t want to see variations on an OPEX each month. With level billing, sometimes called dedicated billing, a monthly cost is determined upon initiation so that there is never a surprise come the end of the month.

Additionally, level billing often offers committed services, meaning that even if an issue arises that the provider needs to take care of, there will be no additional charges.

Another benefit of level billing? Most reputable providers will offer a 12-month SLA review and reconciliation period; if you’re using much less capacity than you’re paying for, you have the ability to lower it and receive lowered pricing throughout the next year.


Consumption-Based Versus Level Billing: Which is Right for You?

How you choose to be charged is up to you, and the needs of your organization. We’ve outlined the pros and cons of each, and are proud to offer both. DSM offers consumption-based, and level billing to all clients, and we’re happy to speak with you about which may suit your needs best. Ready to get started? Contact the experts at DSM today.

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