> Cloud vendor pricing often isn't based on cost.
Business 101 teaches us that pricing isn't based on cost. Call it top down vs bottom up pricing, but the first principles "it costs me $X to make a widget, so 1.y * $X = sell the product for $Y is not how pricing works in practice.
Just to spell this out more clearly for the back row.of the classroom:
The price is what the customer will pay, regardless of your costs.
Economics teaches us that a big difference between cost and price attracts competition which should make the price trend towards the cost.
Practice taught me that that "should" is doing a lot of heavy lifting here and it's often not the case, even across long time periods (years) that should allow competitors to emerge.
For example I calculated the cost of a solar install to be approximately: Material + Labour + Generous overhead + Very tidy profit = 10,000€
In practice I keep getting offers for ~14,000€, which will be reduced to 10,000€ with a government subsidy and my request for an itemized invoice is always met with radio silence.
Only if the barrier of entry is low.
Which it won't be, if at every turn you choose the hyperscaler.
A big difference between cost and price is often won at the expense of many years of concerted R&D, though
Economics has a lot of other lessons teaching us why prices of major clouds have remained somewhat expensive relative to cost
If this is the case, cheap bandwidth for AWS, when?
Exactly.
That's not a business 101.
> That's not a business 101.
It kinda is, but obscured by GP's formula.
More simply; if it costs you $X to produce a product and the market is willing to pay $Y (which has no relation to $X), why would you price it as a function of $X?
If it costs me $10 to make a widget and the market is happy to pay $100, why would I base my pricing on $10 * 1.$MARGIN?
Exactly. The mechanism by which the price ends up as X plus margin is just competition. Others enter the market and compete with you until the returns are driven down to the rental rate of capital. Any barriers to entry result in higher margins.
But that is an equilibrium result, and famously does not apply to monopolies, where elasticity of substitution will determine the premium over the rental rate of capital.