Profit Maximising Contract Plans For Cloud Computing Services

Providers of cloud computing services commonly offer contract plans (e.g., subscriptions) with different contract lengths as an alternative to single period plans. Contract plans are attractive for consumers who use the service periodically because the consumers benefit from significant price discounts if they commit themselves to the service provider for the time of the contract length. However, deciding on price discounts and contract lengths for contract plans is challenging, as binding consumers leads to greater profit, while offering greater price discounts negatively impacts the provider’s profit. The goal of this study is to outline the factors that drive the differences in profitability when offering a contract plan in addition to a single period plan. Therefore, we model consumers’ decision-making process between the two pricing plans and develop a method to maximise the profitability of these plans. The proposed model separates the consumers’ ex-ante probability of needing the service, which is assumed to be independent from the price of the contract plan, from the decreasing marginal utility that arises through the discounted benefits of future usage. In a Monte Carlo simulation, we show that offering a contract plan in addition to a single period plan increases profits by up to 10% and on average by about 3%.