Cloud is About Cost Transfer by Robert Faletra

I recently read an article entitled, “Cloud is about cost transfer,” by Mr. Faletra.  (See CRN, March 2012) He makes a good point–namely, most cloud companies are incurring a capex cost that’s capitalized onto their balance sheet, thus incurring a longer term higher risk and a longer term need for sustaining customers.  I’d like to add to his article about some of the remedies for this, since the cloud industry continues to grow.

Here are some ways to achieve a faster and higher ROI:

1)  Build a unique product and establish barriers to entry to maintain a cost premium

It’s well-known that the number one price control mechanism is owning the supply curve, while the demand curve shifts to the right, driving the price north.  Not only does an increase in demand drive the price up, but also a premium is able to be garnered on top of the market price.  This is why cloud companies must establish a barriers to entry–i.e. network effect, strategic mix, patented engineering, etc–in order to protect their prices and to make a little premium on top of the market price.  I’ll go over barriers to entry on another post, but this is the number one mechanism for ROI.  Be a monopolist.

2)  Be first to market and win customers.

The theory of the “first to market” is nebulous–sometimes it’s better to be first and sometimes is better to be a laggard.  For cloud services, it’s better to be “first to market.”  If you’re first to market, you have the first shot at winning customers.  In general, cloud services have gone beyond innovators’ phase and onto the early adopters’ phase on the diffusion curve.   Because of this, there a  substantial market to be picked up by the first-to-marketers–about 16%.  This is where marketing must accelerate.  Once a product is launched, it’s the marketing department’s job to reach the 16% of the market and win customers over.

3)  Convert your temporary customers into lifelong customers.  Do everything you can to keep your customers happy.

Customer service will be a number one priority, again–a la Southwest Airlines.  With all these monthly no-commitment plans, the ability to defect and go elsewhere is as easy as grabbing a cup of coffee.   This is called the churn rate for cloud services companies.  Once you won over a customer, you should do EVERYTHING you can to keep them.  This could be a bit challenging because cloud companies already don’t make a big margin on each customer, so justifying the cost of customer service may be difficult.  This is where the premium achieved in strategy #1 needs to be sustained.

In short, cloud services are here to stay.  But, as Mr. Faletra alluded to, cloud services companies will be financially challenged.  That market will be a huge global market, with low barriers to entry, high capex, fickle customers, and ugly balance sheets.  However, the upside is huge, with the world as a potential customer.  To make money and to keep this customer happy requires a winning “horse,” great marketing/selling, and outstanding customer services.

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