75% of customers are willing to pay a premium for enhanced hosting and cloud services

Cloud adoption has been soaring over the past few years and will continue to climb, with revenues projected to reach nearly $400 billion by 2020, according to Gartner. However, while on-premises solutions were highly customized or even tailor-made, Infrastructure-as-a-Service (IaaS) is on its way to becoming a commodity as cloudification progresses at lightning speed. Thanks to high degrees of standardization and automation combined with substitutability and price transparency, there is fierce competition in what economists refer to as a buyers’ market.

Untapped room for growth

Although customers are quoting cost savings as a rationale for cloud adoption and using value for money as a metric for evaluating cloud services, 451 Research finds the vast majority of customers are prepared to pay a significant uplift for cloud and hosting service enhancements. In their recent Voice of the Enterprise: Hosting and Cloud Managed Services study, 451 Research discovered that up to 75 percent of respondents are willing to pay a premium for enhancements to their hosting and cloud services. The most demanded improvements are service level agreements (SLAs) covering security (48.7 percent of respondents) and service performance (43.3 percent), with less interest in paying service providers to take on the operational management burden (27.9 percent).

With the average customer willing to spend roughly 30 percent extra for such enhancements, there is ample room to capture market share for cloud providers that address these underserved needs. Users are willing to pay a premium for various services, ranging from the service provider handling operational management (27.9 percent) all the way to enhanced customer service and support (33.3 percent).

Service providers fail to meet their customer’s expectations

Even though higher service levels have great appeal to customers and represent a major growth opportunity, the organizations surveyed say that their providers are failing to meet their expectations in several categories. While 58.1 percent of respondents consider managed services or security services packaged with the infrastructure or application service to be a crucial capability for them, only 38.8 percent of these respondents think their current vendors meet this expectation.

The most significant shortcoming is the ability to shift workloads and data from the customer’s facilities to the provider’s datacenter or another datacenter, including public clouds. While 42.9 percent indicate this is paramount, only one in five respondents say their current vendors meet this expectation.

The findings suggest that there is some sort of a veridical paradox in the market. Service providers are desperately striving for greater differentiation and market share, yet very few are able to take advantage of the situation despite its potential to yield better economic returns. Instead, many continue pursuing their current trajectory and end up in a negative price spiral.

Escaping the commodity trap

“We frequently talk about pricing competition in cloud infrastructure and applications, which leaves many service providers wondering how they can differentiate themselves,” says Liam Eagle, Research Manager at 451 Research and author of the study. Yet, many customers are in fact evaluating vendors on value, rather than cost — more than one might intuitively think. That value can reside in services such as guaranteed levels of performance, uptime, security and support. Other areas of differentiation could include features or functionality, for example.

Although all this is essentially an opportunity handed to service providers on a silver platter, very few have thus far been able to seize the opportunity. “We have found that customers still see shortcomings when it comes to service providers helping them strategize and execute around hosting and cloud,” added Eagle. “Service providers focused on adding value should regard these gaps as opportunities they can capture by improving the quality of their own service in specific areas.”

Indeed, differentiation poses a major opportunity for service providers to escape the commodity trap, come up with a proprietary value proposition, and regain a competitive advantage. As already pointed out by Michael Porter in his 1996 HBR article What is Strategy, service providers must not confuse operational effectiveness with strategy. Otherwise they may encounter hypercompetition, which is “a self-inflicted wound, not the inevitable outcome of a changing paradigm of competition.“ In other words, operational effectiveness is critical, but not sufficient to gain sustainable dominance over rivals. Strategic differentiation is required to create distance from competition. Service providers that recognize and close these gaps will not just enable their customers to better accomplish their goals, but also have an opportunity to maximize market share and financial results by providing greater customer satisfaction.