Competition in the public cloud market has accelerated in the past year and the big three in this market – Amazon, Google, and Microsoft – cut their prices within days of each other to trigger a price war. For all of these firms, cloud services are secondary sources of revenue, and they can afford to not focus on profits in the short term. In comparison, for companies such as Rackspace, participating in this price war is very costly. They neither have the deep pockets, nor do they have additional sources for revenue. What should such companies do in this situation?
Smaller vendors like Rackspace need to offer a level of service that large providers can’t match. Rackspace recently launched a “managed cloud” service with new service levels and a pricing model. Access to hardware is the most basic aspect of cloud services, and at this time, a commodity. Additional value comes from the management of the workloads in the cloud. Rackspace is looking to leverage its service capabilities to set itself apart from price-focused competitors and justify its higher prices. Not all customers will want this premium level of services, but the ones who do will evaluate the trade-offs between unmanaged and managed clouds and their respective cost of ownership.
To ensure customers know the difference between the managed and unmanaged clouds, Rackspace has made some changes to their pricing model as well. They now separate prices for basic cloud infrastructure and the service and support costs. This allows Rackspace to present cost comparisons with competitors more accurately and use that again as an opportunity to show customers the additional value they provide with their service and support.
Such innovation will increase the table stakes and weed out competitors who have nothing compelling to offer. The question Rackspace needs to answer is – how long can these managed services remain differentiators? As the market matures, competitors will catch up, and if Rackspace wants to continue charging premium prices, they should stay ahead of the competition with differentiated offerings.
Originally published in the Holden Advisors July 2014 Newsletter.