The Dos and Don'ts of Negotiating Cloud Pricing Discounts
- By Willy Sennott, Vega Cloud
- December 18, 2023
At first glance, negotiating pricing discounts with cloud providers may seem simple enough. You tell them which types of services or products you need and in which volumes, then see which discounts they'll offer, right?
Well, not necessarily. That approach might secure some discounts, but it leaves cloud providers in the driver's seat and is unlikely to result in the best possible cost-optimization outcomes for your cloud.
A better strategy is to go into your negotiation armed with the right data, business plans, and knowledge about how cloud providers think and what they are—or aren't—willing to discount to secure your business.
To that end, here's a look at 7 dos and don'ts of effective cloud pricing negotiations. By following these tips, you can develop a nuanced cloud discount strategy that results in the best cloud services and products for your business at the lowest possible price.
How cloud pricing negotiations work
Let's set the stage by explaining what a cloud pricing negotiation is and how these discussions typically play out.
To be clear, I'm not talking about practices like selecting Reserved Instances when choosing a cloud VM. That's not a negotiation; it's just a way of taking advantage of discount offerings that clouds offer to any customer.
Instead, a cloud pricing negotiation is a discussion that high-volume consumers of cloud resources can have with cloud providers. If your business consumes large volumes of cloud products—on the order of at least six figures worth of spend per month—you're a candidate for negotiating discounted pricing. Cloud providers are typically willing to offer services at a reduced cost to major customers.
In exchange, the providers usually expect a committed-use agreement on the part of their customers. That means you must commit to using the discounted cloud services for a fixed period.
Best practices for negotiating cloud pricing deals
Again, getting the best deal when negotiating with a cloud provider requires a strategic, data-driven approach. Here's a look at what you should and shouldn't do.
1. Do know your spending plans
For starters, you can't negotiate a committed-use discount very effectively if you don't know what your cloud usage rates will actually be. You need a specific estimate of the total computing, storage, and other resources your business will require over a fixed period. Armed with that data, you can ask cloud providers for the best possible pricing for those resources over the period you plan to use them.
You can project your cloud resource needs based on historical spending data. But be sure to factor in net-new workloads that you haven't deployed in the cloud in the past but may add in the future.
2. Don't let cloud providers begin the negotiation
It's common for cloud providers to track the resource usage patterns of their high-volume customers and then approach people inside those businesses about pricing negotiations.
This may seem like an easy way to obtain discounts. After all, why not let the providers come to you offering lower prices in exchange for committed use agreements?
The answer—which ties into the point I just made above—is that cloud providers have limited insight into which cloud resources your business actually needs. They may tell you that they can offer a specific discount on your most commonly used products based on your historical usage. But they don't know how your workloads or business needs may change in the future, so the discounts they offer may or may not make the best sense for your business.
Instead, wait to begin discount negotiations until you know what your business needs from the cloud, and make sure to align the discussions with your requirements rather than what cloud providers think is best for you.
3. Do prioritize certain business units
The simplest approach to cloud pricing negotiations is to aim to reduce your overall cloud spending. However, some business units likely consume more cloud resources than others. For example, a department building generative AI models may require vast compute resources as it ramps up its operations.
Rather than looking for across-the-board discounts, you may be able to strike a better deal by pursuing discounts for specific business units. A group that needs massive amounts of compute to support generative AI development may stand to save more money by negotiating reduced pricing for the types of compute instances it uses, for example. In the long run, this could translate to more savings than reducing your average cost for compute instances across all business units.
4. Don't threaten to switch to another provider
Threatening to take your business to a competing cloud provider may seem like a straightforward way to apply leverage when negotiating pricing discounts. But the reality is that switching clouds is a highly complex process that takes a long time, and few businesses actually do it.
The cloud providers know this, and they are not likely to be swayed by threats to flock to competitors. Unless you have a migration that is already underway (in which case there may not even be much of a point in negotiating with the provider you're leaving) or a large established footprint in a competing cloud, it's not wise to make migration threats that you likely aren't in a position to carry out, at least not in the near term.
5. Do know which cloud products your provider wants to expand
Cloud providers offer many different products and services and may be keener to provide discounts on some. If they've recently added a new type of service, they may want to grow their customer base or market share surrounding it, for example. Or, they may have over-invested in a particular product and be eager to acquire more customers.
Cloud providers aren't typically forthcoming with this type of information. But you can at least develop some insights into which services a provider is most interested in expanding based on product announcements, leadership changes, etc. Then, you can focus on those products when requesting discounts.
6. Don't settle for cloud optimizations over discounts
If you find that a provider is not initially willing to offer the level of discount you were hoping for on a particular service, you might decide to back down and focus on optimizing your use of that service as a way of reducing costs rather than asking for deeper discounts.
The problem is that optimization is often easier said than done—even when done well, it takes time. Perhaps you can reduce your spending on VMs by 20% if you optimize your instance types and management practices. But if it takes you two years to implement those optimizations, that's a lot of cash that you will have wasted. It may make more sense to push for deeper discounts based on your current consumption patterns since you can begin leveraging the discounts immediately without implementing any changes on your end.
7. Do treat your cloud provider as a partner
Ultimately, your goal when negotiating cloud pricing discounts should be establishing a long-term relationship that allows you to grow as the cloud provider grows. This doesn't happen if you approach negotiations as a zero-sum game, aiming to secure the lowest possible prices as quickly as possible.
Instead, you need to aim for balance. Maybe your provider isn't willing to offer all the discounts you hoped for upfront. Still, you may be able to negotiate additional ones in six months or a year if your consumption increases. In the long run, that approach can lead to a better outcome than hammering your provider to obtain a significant one-time discount but being unable to ask for additional discounts in the future.
Conclusion: Navigating the complexities of cloud pricing negotiations
Getting the best possible deal from a cloud provider is hard work. (I would know because helping companies reduce cloud spending and negotiate discounts is what I do all day.) But if you take a nuanced approach and prioritize long-term success over short-term wins—and if you're armed with the right data about your cloud resource requirements and business needs—you can negotiate effectively, striking deals that benefit you while also building strong relationships with cloud providers that will endure over the long term.
The views and opinions expressed in this article are those of the author and do not necessarily reflect those of CDOTrends. Image credit: iStockphoto/metamorworks