What is a Cloud Private Pricing Term Sheet?
May 12, 2021

What is a Cloud Private Pricing Term Sheet?

Aniqa Hassan

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Private Pricing Term Sheets (which we will refer to as PPTS) are a cost saving mechanism offered by cloud vendors for enterprise customers with large spends. It requires customers to be signed up for Enterprise Support and provides a discounted rate on the total bill in exchange for a commitment to spending a certain amount annually.

Committing to spending larger amounts of money or for longer periods of time increases the discount provided. Any spending beyond the commitment amount will not receive the discount and will charged at On-Demand price. If you spend less than your commitment, you must still pay your full commitment. This means that PPTS are most helpful to companies that have an accurate gauge of their yearly spend and spend the full amount they commit to.

To give you an example, imagine Company A is using a PPTS and makes an annual commitment of spending $1 million in services for a period of 3 contract years. In exchange for this commitment they will receive a 9% discount on their total AWS bill each contract year. This means that they will be able to use $1,098,901 in services each year for $1,000,000.

One of the challenges of using PPTS is making an annual spend commitment that will accurately reflect your future use of services. Underestimating your annual spend will lead to a commitment that does not cover all services you use. In this scenario Company B has the same PPTS terms as Company A, but ends up spending $1,500,000 in services in contract year 2. This translates to $401,099 in spend not being covered by the PPTS and missing out on $36,099 in savings.

Private Pricing Term Sheet vs Enterprise Discount Program

PPTS is not actually a new program, but rather an updated version of pre-existing Enterprise Agreements (EA) & Enterprise Discount Programs (EDP). While PPTS retain many of the original features of EAs & EDPs, there are some notable differences. The first one is who qualifies for the discount. The EDP required a minimum commitment of $1 million per year to qualify for a discount. PPTS lowered the minimum to $500 thousand per year. Lowering the barrier to entry opens the doors for customers who would not qualify for the discount under previous EDP & EA.

Both AWS EDP and PPTS provide higher discounts to larger spends or longer term commitments, but the discount is larger for PPTS relative to EDP. Cloud vendors prefers multi-year commitments and would rather have customers committing to spending $6 million over three years than $2 million annually for three years. Multi-year contracts are further incentivized by allowing customers more flexible spending year to year as long as they spend the commitment amount by the end of the term. ---This was not possible under the EDP. Company C made a $6 million commitment over three years and Company D made a commitment of $2 million per year for 3 years in exchange for a 10% discount. Both companies used less than $2 million in services in their first year. This did not affect Company C, but Company D ended up having to pay more than the services they actually used. Both companies spent $2,600,000 in year 3, but like Company B, Company D missed out on savings because their commitment didn’t cover their total spend.

Like its predecessor, PPTS are highly variable from customer to customer because discounts are negotiated directly with cloud vendors on a customer by customer basis. That’s why you won’t find a standardized discount rate on the public websites. These programs can generate significant savings, if you negotiate with your cloud vendor well. Many customers miss out on savings because they do not ask for the right things to be included in their PPTS, EDP or EA.

Negotiating Cloud Private Pricing Term Sheets

Negotiating Cloud Private Pricing Term Sheets

If you're interested in optimizing your cloud costs through commitments, Archera offers a single platform solution to continuous and automated cloud management. To learn more about our platform, get in touch with our team by filling out a form here or request a demo to schedule a call with an expert.

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