Advanced Search

$ 0 to $ 1,500,000

More Search Options
we found 0 results
Your search results

Undercutting the competition: 10-25% cheaper is right for enterprise cloud buyers

Posted by Natalie Steinwand on May 28, 2019
| 0

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.

The 451 Take 

Cloud is not a commodity. A bag of flour a few percentage points more expensive than another will attract no buyers – this is a commodity. Our research shows that few IT decision-makers will realistically consider moving for savings of less than 10%. After all, 10% is a lot of money: If an IT department were able to reduce its budget by 10%, it would receive accolades from around the company. The key range to undercut is 10-25%. Below 10%, and the provider will win little business as a result, but will lose margin. Above 25%, the provider won’t win much more incremental business, but margins will be severely impacted; in other words, it will win as much business at 40% as it would be likely to at 25%. This data captures the concept of ‘value’ because if a cloud is seen as valuable, enterprises will be less likely to move to save money. The data also captures switching cost, because no one is going to switch clouds unless it’s worthwhile. Senior managers, in particular, appear to be aware of this value and switching cost, and are less likely to want to change, even for big savings. If the cloud is production, these effects are far more powerful. Remember, switching cloud providers is not a simple task: undercutting competitors sporadically makes little difference; guaranteeing to be cheaper in the long term is the key.


Price sensitivity

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:

  • Below 10% savings, hardly any of our respondents would change providers. Considering the hassle of switching, and the importance of cloud today to revenue, this makes sense.


  • Above 10% and below 25% savings, the number of enterprises moving rapidly grows with savings. For every 10% savings the win rate is likely to grow by 20%.


  • Above 25% savings, the vast majority of enterprises have already moved (roughly 70%). Increasing the savings beyond 25% has little impact to win rate, but it does heavily impact margins.

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:

  • Senior management is more concerned with the business value that cloud deployments add, and cost saving isn’t a priority.


  • Senior management is aware of the risks, complexity and overhead associated with changing cloud providers, and wants to achieve a greater savings to offset these factors.


  • Mid-level management faces top-down pressure to reduce costs on an overall basis, and sees cloud as one option to do this. One mid-level management respondent from the aforementioned study said, ‘Once we put something up, we’ve decided on what the budget for running that solution will be for X years. As long as it doesn’t deviate from that, the system wouldn’t be in an alarm state. It doesn’t mean we don’t keep revisiting it to see if we can lower the cost.’


  • Engineering management isn’t being made aware of the value cloud brings to overall business, seeing it as a cost to be borne, rather than a platform to be maximized around the business. One engineering manager said, ‘We’re very interested in price. We’re constantly looking to save money, do more with less. So price is huge. The agility portion isn’t really a big factor for us. But the agility would come secondary.’

This is speculation, but from the data, we can derive two tips for service providers:

  • If you can, sell to senior management. If they are stakeholders in cloud procurement from day one, it is more likely that they will argue to continue to use an existing cloud platform, rather than risk changing tack.


  • Sell the value benefits to everyone, not just senior management, and not just when the deal is being closed. Educate all customer stakeholders on the value you add, and avoid focusing too much on cost, or you might inadvertently be identified as a commodity.



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?

  • Try to sell into enterprises before a formal evaluation is underway, and focus on the value you bring to the overall enterprise – not just in nickels and dimes.


  • Assist enterprises at every step of an evaluation; the aim is to get that completed ASAP.








Leave a Reply

Your email address will not be published.

Compare Listings