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Cloud Computing Cost Models : Don’t Sweat It

with 5 comments

pile of dollars

I get asked reasonably often to help companies and individuals come up with a cost model for their cloud computing. People get really exercised about the cost of hundreds of compute nodes and terabytes. I know what these models should look like because I built and insanely complex model for PutPlace in 2006 when we founded the company and decided to deploy it on Amazon. I had the same concerns that most people had, was  I building a business that was going to explode in my face because I had made some fundamentally flawed economic assumptions?

Once we launched PutPlace we rapidly discovered a number of  interesting facts about our cost structures. The first one was that in a small online business such as PutPlace the compute costs dominate to the point that storage, bandwidth and transaction costs are essentially rounding errors. The second thing we discovered is that attracting enough users to move the needle from a compute perspective is “ahem” challenging for most companies.  With consistent upload rates of over 10k files per day (with occasional peaks exceeding 100k files daily) our grid wasn’t even breaking a sweat. We had absolutely no red-line events on compute and of course AWS happily absorbed everything we threw at it without blinking.

Even at the end of 2008 when the service had been up and running for 6 months over 75% of our costs were compute nodes.

So if you want to understand your cost basis a very simple model is to work out the number of compute nodes you want to run, price those nodes in AWS (or Slicehost or Rackspace) and use that as a monthly cost model for your whole environment. Once you have a few months of price data, you can subtract your compute costs to find out your variable costs in storage, transactions and bandwidth (which I’m betting will be marginal).  Now you have the marginal costs you can compute your variable cost per active user and now you know what your cost-plus price model basis is for each user.

You should still analyse your bill once a month to prevent surprises (like when we discovered we had 12 months of database snapshots taken at 5 minute intervals that no one was cleaning up) and to understand how the dynamics of your system are changing, but your key focus should be on your overall business model and your customer acquisition strategy.

Think of cloud computing like any other variable cost in your business, when you are small they are marginal (have you every priced up electricity usage in your startup financials?) and if you get big it just becomes a cost of doing business, so don’t sweat it!

(Most of the above applies equally well to building a “scalable” system, NoSQL boosters should take note!)

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Written by Joe

October 16, 2010 at 1:30 pm

5 Responses

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  1. Thanks for sharing this, really good advice.Will be keeping a sharp eye on those amazon bills though!

    Siun

    October 19, 2010 at 9:01 pm

  2. Hi Joe, thanks for the post. I’m currently toying with the idea of using vmforce to develop a web app rather than go down the traditional php route. Having gone down the cloud development route what advice would you have for a first time entrenpreneur looking to start small but grow quickly?

    rob.

    Rob

    November 23, 2010 at 3:39 pm

    • Hi Rob,

      VMForce looks good but does it lock you into their platform. Thats no problem in itself, but you should be aware of the long term implications of being tied to a single platform. Its brand new and thats always a worry, new stuff takes a while to settle down.

      Joe.

      jdrumgoole

      November 23, 2010 at 10:32 pm

  3. Thanks for the feedback Joe, we’ve since decided to go down the heroku.com route which I guess is a bit of a gamble considering what you said above. My main problem now is trying to project costs based on this model for the website. Have you any suggestions regarding trying to compile the projected costs as I have to submit a business plan etc. and we haven’t even gone into beta as yet:( Rob

    Rob

    January 13, 2011 at 1:39 am

  4. Hi Rob,

    Same rules apply. The costs will be marginal. Heroku is now part of the RackSpace stable so expect cost to align with either slicehost or RackSpace Cloud.

    Joe.

    Joe Drumgoole

    January 13, 2011 at 10:04 am


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