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Methods to calculate the charge model for an Azure (cloud) solution

Did you ask yourself how does a cloud provider change you? In this post we will take a look on 7 different charge methods.
There are multiple ways on how can charge the end clients when they are using your service, Things can become more complex when you need to calculate the running costs on top of which you add your own costs and cap.

There are 7 different ways for chargeback allocation that you can use inside your organization. From simple ones, that takes into account the number of users or a specific KPI, to more complex ones where IT cost together with stuff costs are putted together. The chargeback allocation methods are:

  • High Level Allocation (HLA)
  • Low Level Allocation (LLA)
  • Direct Cost (DC)
  • Measured Resource Usage (MRU)
  • Tiered Flat Rate (TFR)
  • Negotiated Flat Race (NFR)
  • Service based Pricing (SBB)

Let’s take each of them one by one and identify what are the chargeable metrics that are taken into account.

High Level Allocation
When using this method to calculate the charges, you need to take into account only a simple metric like size of department, number of employees or number of active users. For more complex system using only a size metric is not enough to be able to estimate the cost.
This charge method is common for communication platform where based on the number of users you can charge the consumer.

Low Level Allocation
This chargeable metric takes into account not only the headcount, but also the number of servers or cluster size. For example, this allows us to calculate the cost taking into account that for each 100 users we need two additional nodes into our cluster.
It’s a common mechanism used for CRM system, where the charge is done based on the number of users or clients combined with number of servers that are required on the background.

Direct Cost
Charges are calculated based on ownership-dedicated costs, which can be fixed of variable. Inside direct cost, we need to include not only the running costs of our solution, but also the cost of support team (including salary) and variable costs that can appear based on the number of our clients.

Measured Resource Cost 
This is a more complex way to calculate the cost. For this you need to take into account all resources that are consumed from Azure, like egress cost, bandwidth and storage cost for specific actions. Even if this method to calculate the cost is better than the previous ones it’s more complex. Taking into account all costs it’s hard because requires to know how many resources are consumed by each use case. Without knowing very well the NFR and the platform that it’s used by the solution it’s almost impossible to calculate the cost.
For example Azure Storage it’s a good example, where specific charge exist for each activity

  1. Store
  2. Transaction
  3. Egress

Tiered Flat Rate
Charge to the consumer is done without taking into account if he use or not that service. This model is common especially for services that are requiring resource reservations. Azure SQL Database it’s the best example, when you are charged the same amount of money if you use or not that service.

Negotiated Flat Rate
In this case the price is negotiated between the cloud provider and consumer. In this case the consumer is coming with their requirements and needs and the price is negotiated between two parties. The biggest advantage for the consumer is related to the price that is flat and does not change. In the same time, he does not have information related to consumption levels.
These charge method is common especially for virtual data center scenarios where charges are calculated per specific units with different tiers levels. Similar to the one that we have on different Azure services where we have Basic, Standard, and Premium.

Service Based Pricing
These charges are per specific measured unit of service. The level of transparity is much higher because consumer is paying for each resource he consumes. In the same time, it’s more complex to calculate the overall costs because are many variables and metrics can be different for each use case.

As we can see, deciding on what method we want to use for charge model it’s not an easy task. Take into account that even if you expose to the consumer a simple charge model like High Level Allocation, you will still need to calculate your Direct Costs and measure all the costs that are involved in running the platform. Don’t forget that beside fix and variable costs, you’ll have all the time direct and indirect costs.


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