Hedonic Pricing of Cloud Computing Services

Abstract

Cloud service providers (CSP) and cloud consumers often need to forecast the cloud price to optimize their business strategy. However, pricing of cloud services is a challenging task due to its services complexity and dynamic nature of the ever-changing environment. Moreover, the cloud pricing based on consumers' willingness to pay (W2P) becomes even more challenging due to the subjectiveness of consumers' experiences and implicit values of some non-marketable features, such as burstable CPU, dedicated server, and cloud data center global footprints. Unfortunately, many existing pricing models often cannot support value-based pricing. In this paper, we propose a novel solution based on value-based pricing, which does not only consider how much does the service cost (or intrinsic values) to a CSP but also how much a customer is willing to pay (or extrinsic values) for the service. We demonstrate that the cloud extrinsic values would not only become one of the competitive advantages for CSPs to lead the cloud market but also increase the profit margin. Our approach is often referred to as a hedonic pricing model. We show that our model can capture the value of non-marketable features. This value is about 43.4 percent on average above the baseline, which is often ignored by many traditional cloud pricing models. We also show that Average Annual Growth Rate (AAGR) of Amazon Web Services' (AWS) is about -20.0 percent per annum between 2008 and 2017, ceteris paribus. In comparison with Moore's law (-50 percent per annum), it is at a far slower pace. We argue this value is Moore's law equivalent in the cloud. The primary goal of this research is to provide a less biased pricing model for cloud decision makers to develop their optimizing investment strategy.