A price-sensitivity analysis of enterprise cloud buyer behavior finds that being a few percentage points cheaper doesn’t guarantee a greater volume of sales. Low double-digit savings drive decision-makers to be more open-minded, but savings of greater than 25% don’t incrementally win more business.
Price elasticity of demand is essentially a measure of by much how demand changes due to a change in price. If a company, keeping everything else the same, drops the price of a product, how does it expect demand for that product to change – a drop in price usually leads to a growth in demand, up to a point.
We can take this concept and turn it into a measure of price sensitivity. If a provider were to drop the price of a comparable ‘substitute’ good so that it undercut the price of a competitor, how would the provider benefit from customers moving to it from the competitor?
In our Cloud and Managed Services, Budgets Q4, we asked respondents to tell us what level of savings would make them move from their current cloud provider to a competitor. In this sense, we can capture – on average – how many companies would change cloud providers for each level of price savings.
However, we should regard our measures as indicators of price sensitivity rather an absolutes. If it’s so easy, why don’t the cloud providers just do this? For a start, this undercutting has to be a long-term, guaranteed savings on everything. The long-term and guaranteed part of this equation makes it a challenge – no one is going to jump ship to save 10% over a few months. If one cloud provider undercuts another provider by 10%, we can expect the competitor to respond in kind, thus making such a change not worthwhile. Additionally, just knocking down virtual machines won’t suffice, it has to be a savings on overall consumption. And of course, with each price cut, there is bound to be a cut in gross margin for the service provider – even with more volume, profit won’t necessary be better. Putting it another way, if a cloud provider contractually guaranteed – over a five-year period – to be always 20% cheaper than its competition, would this be a compelling offer? Is it feasible that such a dramatic change would be a serious dent in its competition? Yes, if the cloud provider has the reputation to pull it off.
The markers above show the percentage of all respondents that stated they would move at a particular savings. A steeper line meets greater price sensitivity (i.e., they are more likely to change providers for a small savings); a flatter line indicates smaller price sensitivity. There are a few key areas of note:
We analyzed this data in depth to determine if any particular organizational characteristics drove price sensitivity. Were smaller companies more likely to jump ship for a smaller savings compared with large enterprises, for example? Revenue, employees and other factors showed no clear correlation to price sensitivity – in other words, regardless of company size, enterprises are equally price-sensitive. The fact that splitting the data by a number of variables yielded the same level of price sensitivity validates our methodology. The biggest differences in price sensitivity were seen in role and cloud maturity; different individuals had different views of when it was worth switching cloud providers.
Price sensitivity by role
The colors in the above chart represent the type of respondent. Mid-level management’s enthusiasm to jump ship is tempered sharply by senior management, which is far less keen to move. A guaranteed savings of 25% means about 40% of senior managers would think it makes sense to move providers; contrast this to a hefty 80% of mid-level managers. Engineering management is in the middle, seeing a 25% cut as worthwhile in about 60% of cases. At a 45% cost savings, 99% of our mid-level management would switch providers; just over 60% of senior managers would move at this same savings.
Mid-level managers (and many IT managers) can’t see any benefit in moving for savings of less than 7%, but when it ramps up to 12%, 30% want to take advantage – this is almost a ‘tipping point’ for moving to be worthwhile. At 27%, 85% of mid-level managers would move. However, as the discount increases after this point, fewer companies see the benefit in moving. Those that are price-sensitive have already cracked and jumped ship, those that aren’t price-sensitive don’t really want to move at all. This is shown most explicitly for senior managers – increasing the savings from 35% to 45% makes no difference to senior managers; they just aren’t that interested.
So why the difference? This is the million-dollar question. We think it’s a perfect storm of:
This is speculation, but from the data, we can derive two tips for service providers:
Price sensitivity by maturity
Another big indicator of the price sensitivity of respondents is how mature they are with regard to cloud deployment.
For those considering cloud with no formal plans, these respondents were the middle of the road, with 82% moving at a savings of 27%. Those currently evaluating cloud are far more price-sensitive; at a savings of 27%, every single respondent evaluating technology would move. Counter this with those that were executing upon a cloud – a 27% cost reduction would result in just 60% of enterprises changing providers. Once again, being cheaper by a few percentage points is pretty much irrelevant.
This makes sense. If you are evaluating a range of clouds, you are far more likely to be price-sensitive because you are comparing options and open-minded with regard to the features and benefits of those options. Choosing a course of action at this point is relatively simple, compared with moving a public cloud that’s already up and running. Once deployed, the cloud is adding value to the business – to move is a bigger risk and a bigger hassle, and a larger savings is needed to justify the switching cost. So what can service providers do to capitalize on this finding?