With cloud inflation reaching an all-time high in the recent 40 years, it is not surprising to witness several enterprises struggling to control the cost of their cloud services. Inflation is definitely at the top of everyone’s mind, and it is quite inevitable as we have only recently come out of the global pandemic. As of May 2022, the U.S. inflation rate is 8.6% which is the highest since 1981. Apart from the expected effects of the Covid-19 pandemic, the invasion of Russia in Ukraine has also led to major price gains in various sectors, such as transportation, food, and energy commodities like oil and fuel.
The high inflation rate has definitely had an impact on cloud prices as well. This cloud inflation has resulted in various SaaS vendors exploring options for increasing their prices, probably for the first time ever. This means that inflation has a direct impact on SaaS’s expansion budget in the future. Even a minimal increase of 5% can attribute to an increase from $100B to $900B in the overall business software spending.
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Impact of Cloud Inflation on SaaS Business Models
Businesses in the IT industry that follow the traditional transaction-based business models can implement the standard method of passing the costs on to their customers. However, this approach does not work well for businesses that follow the anything as a Service (XaaS) subscription model and Information Technology Outsourcing (ITO) and management agreements. The impact of inflation is more severe here.
With cloud-based SaaS models being relatively new, many advocates of this business model believe that the traditional business model metrics and analysis are not relevant as the bulk of the selling expenses is determined in the first fiscal quarter of the agreement, and the revenue is determined over the period of the contract. As a result, these business models rely on new business metrics, such as net dollar revenue retention, annual recurring revenue (ARR), and lifetime customer value.
Immediate Inflation Risk on SaaS Business Models
SaaS business models fall under the category of the force multiplier effect or the flywheel effect, wherein it can take up to several years to make a profit. The operating costs of these models can go up by several points as a result of increased labor and utility costs that are attached to these long-term contracts. This means that the newer SaaS operating models will relatively face fewer risks while structuring their costs as there is lesser renewed revenue. On the other hand, SaaS models which have already been in place for quite some time may face a more serious business operating impact as their business models have more accrued or committed revenue.
For ITOs, the impact of inflation on the costing structure will require them to enhance their business practices with increased low-cost labor or increased automated capabilities. Irrespective of enhancing their business practices, the operating profits will definitely see a decline unless the business owners try to negotiate with their customers regarding the incremental costs.
For SaaS providers, the primary focus areas in 2022 are cost reduction and margin improvement. With a marked downturn in the economic world, it is not surprising to see why improving profit margins is one of the core goals. One of the areas where the impact of inflation is highest for SaaS business models is their freemium pricing models. In this pricing model, customers can use the service without paying anything. Of course, they will have access only to basic features, but that is often sufficient for the majority of organizations. The SaaS providers usually only charge for the premium plans; however, with inflation making such drastic impacts, these providers need to keep an eye on the rising cloud costs in order to maintain their gross margin.
Examples of Inflation on SaaS Providers
Several SaaS giants have already started increasing their prices. For example, Adobe recently raised their Creative Cloud’s pricing in the range of 3.8-6.3%, depending on the plan that the user has or purchases.
Google has also announced a massive price increase ranging from 25-50% in their cloud storage costs. The cost of data transfers for object storage which was earlier available for free, is now priced at two cents, even if the data remains on the same continent. Although two cents may not sound much, if you look at the larger picture, it can translate to up to hundreds and thousands of dollars.
Using Artificial Intelligence to Reduce Cloud Costs
Artificial Intelligence (AI) has truly transformed the way businesses operate. Implementing AI technology offers businesses a long list of benefits which includes increased productivity, faster completion of tasks and processed through automation, improving customer experiences, making better business decisions, etc. What many businesses are not aware of is that AI can also help in mitigating cloud costs. Two key ways in which AI can assist in reducing cloud costs are:
- Identifying Spikes and Glitches – The cloud is essentially a utility, and there is scope for price spikes when a utility is used incorrectly or used at a much higher rate than needed. It is imperative for companies to identify this wasteful cloud spending as quickly as possible. This can be done effectively by leveraging various AI solutions that can help businesses automatically monitor and detect any cloud usage irregularities. AI-based solutions are also more accurate than various labor-intensive processes.
- Future Costs Forecasting – With the help of AI-based solutions, companies can proactively and effectively manage their overall cloud spending. Using AI, they can forecast the future costs of various cloud services. Apart from forecasting the future costs, these solutions also provide deep insights into how much cost each service consumes in the future months. Another benefit of using AI technologies is that it can catch any mistakes much faster than human intervention. It can also save storage costs by forecasting when to use compressed files instead of uncompressed ones.
Though many companies are still hesitant about leveraging AI technologies which may be due to a lack of sufficient understanding, they must understand that AI is one of the best solutions for reducing their high cloud costs.
Inflation is a risk that is definitely here to stay, at least for the foreseeable future, which means finding solutions if the need of the hour. One of the best solutions is definitely a technology that can play a major role in receding the global cloud inflation. Technology has played a crucial part in reducing costs and driving human productivity up. Of course, we also need to focus on the other factors behind inflation, such as keeping a check on geopolitics, our dependency on energy resources, etc. We must also look at ways to increase investments in renewable energy and nuclear power.
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