Unlocking

Unlocking

The Revenue Potential of IaaS

Key Takeaways

Bill-forward SaaS-style billing model
  • IaaS makes you sticky with your customers
  • Overages can be good, it opens the opportunity to upsell rate plans
  • Cost of IaaS is going down, increase your margins over time

Providing IaaS to the end customer can be extraordinarily complex (Azure has over 20,000 distinct sku’s), and the usage-based billing model can often provide challenges for Managed Service Providers (MSPs), including slim margins, unpredictable bills that are multiple months behind, and more.

That said, MSPs focusing on the small and medium-sized business (SMB) market are finding increased success moving their business to the cloud. The flexibility, stability, scaling, and incredibly fast turn-around time of IaaS are tremendous, and often cited benefits of IaaS.

But how are MSPs unlocking the revenue potential?

Craig Donovan

VP of Product Development

Pax8

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Bezos' Law

Bezos' Law

Jeff Bezos (Amazon CEO) observed that the cost of Cloud computing dropped by 50% every 3 years.

The first building-block about the IaaS opportunity can be found in an interview with Jeff Bezos, CEO at Amazon, published by Gigaom in 2014**. In the article, Jeff proposed a change to Moore's Law that applies specifically to cloud services.

From 2006 to 2014, Jeff observed that the cost of cloud computing dropped by 50% every three years. While there have been only some signs of slowing lately, overall, IaaS costs are trending down.

Gartner***recently projected at least 10% year over year cost reductions through 2020. In this statistic exists an opportunity for MSPs to leverage the natural combination of technological innovation and market pressure.

A common instinct is to apply a static or percentage-based margin on top of the customer's actual usage. In the first example, we chart applying a static margin. Notice that as Bezos' Law takes effect, the actual revenue benefit for the MSP remains fixed.

In this next example, we see what happens if you change your margin based on a percentage of cost. As costs decrease, the percentage-based margin also trends toward zero.

SaaS-ify

SaaS-ify

Your Infrastructure
Your Infrastructure

Bill ahead using rate plans to make it plain and simple for your customers.

Consider changing your billing model from an arrears/usage-based model, to a simpler, bill ahead, monthly recurring service. By setting a fixed cost, the forces of Bezos’ Law work for you. We now see that as time goes on, a recurring cost to the customer yields an ever-increasing profit margin.

This chart implies that optimizations can be realized through IaaS, which provides direct benefit to the MSPs’ bottom line.

 

The fixed rate schedule provides other benefits as well. By offering a fixed price to your customer, you create a pattern of predictability in your customers’ invoices, easing the transition to IaaS. This allows customers to better plan their own finances, and it generally raises comfort level.

Anyone who bills in arrears understands the potential risks that come with collections. Billing accurately against a usage model requires waiting until the vendor reports usage. This generally happens around the 5th of the month following usage and is often after the invoice period.

In this scenario, you are stuck trying to recoup costs for something that happened one, two, or even three months ago, and it increases your exposure to the potential of non-paying clients and collections.

However, we have a solution to this. If you bill forward similar to cell phone service, this problem is largely mitigated. In the case of non-payment, service suspension applies to the current month.

It can be that simple.

Overages

Overages

Don't stress overages, they are a chance for you to upsell your customer to a new rate plan that fits their needs.

For instance, if a client has $1,000 in standard infrastructure usage and a $250 overage, by billing in advance for expected usage, the client has an un-expected bill of $250, instead of an unexpected $1,250 bill. Essentially, it is the same math but different psychology.

Overages are an opportunity. 

When setting up the agreement with the client, establish that their flat fee comes with some caps, just like a cellphone data plan. If the client uses more than they are allotted, you then charge a one-time overage fee to recoup those costs.

More importantly, overages provide an opportunity to move them into a more substantial service to fit the client’s future needs. Waiving overage charges when moving to a higher price tier can be an opportunity to strengthen the client relationship and grow long term revenue.

Think of IaaS billing as an environment where the customer usage fluctuates, but each spike provides the MSP an opportunity to raise the level of service provided.

Design

Design

Your service plans

Your service plans

Make choosing super simple for your customers.

Make choosing super simple for your customers.

Building out your service plans and deciding what to charge can be intimidating with usage-based services. The good news is, IaaS charges are actually very predictable.

In general, the primary area that the end customer can influence is bandwidth. Try to approach your plans in three steps.

First, design the servers needed for your customer business case. Use the calculators provided by the IaaS providers to accurately estimate those costs.

Next, add in your margin in the form of a service fee.

Finally, identify one bandwidth tier that covers current projected client bandwidth (including backup traffic), and then two to three more tiers they could grow into. Once you attach the bandwidth costs to the server and service fees, you have your tiered plans. 

Step-By-Step Plan

Step-By-Step

Plan

to convert Iaas to saas

Step-by-

step plan

to convert Iaas to saas

1
Determine projection of customer use
2
Design your “good, better, best” tiered service offerings, including data caps
3
Establish the recurring contract with the customer and an expectation of what happens if they exceed bundled usage
4
Configure virtual servers to take advantage of low usage periods
5
Monitor customer usage
6
Charge overage fees as required and use overages as opportunity to increase level of service

How

How

PAX8

Can help you

Can help you

Pax8 is your Cloud Wingman because we can help you accomplish each stage of this plan. Our IaaS sales engineers are equipped to enable initial system design and planning, we offer optimization techniques, and strategize ideas to lower your costs.

The Pax8 proprietary IT platform, called the Command Console, provides calculators and threshold management capabilities to project costs and automatically monitor customer usage on a daily basis. If our system detects that a customer is trending toward thresholds you configure, we’ll notify you.

Finally, we integrate with PSA tools, like ConnectWise, to help you create both the recurring charges and the retroactive overage charges.

Partner with Pax8 and grow your IaaS business today.

About Pax8

About Pax8

Pax8 is the leader in cloud distribution. As a born in the cloud company, Pax8 empowers managed service providers (MSPs) to capitalize on the $1 trillion cloud opportunity. Through billing, provisioning, automation, industry-leading PSA integrations, and pre-and-post sales support, Pax8 simplifies cloud buying, improves operational efficiency, and lowers customer acquisition cost.

Pax8 is a proven, award-winning disruptor in the market, earning accolades like NexGen’s Best in Show two years in a row, Biggest Buzz at IT Nation, CRN’s Coolest Cloud Vendor, Best in Show at two consecutive XChange conferences, HTG’s Rookie of the Year, and more. If you want to be successful with cloud, you want to work with Pax8. Get started today at www.pax8.com.

 

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