Extremely Aggresive Pricing Makes Google Apps Premier Edition Sexy to Small and Medium Sized Businesses

February 22, 2007

It seems like the SaaS media relationships departments have been busy since last night. Microsoft and BT are talking about BT Application Marketplace, Salesforce is hinting about its 25,000 user customer and Google is in fanfarre-mode with Apps Premier Edition. It’s a busy today for Software-as-a-Service (SaaS), but I am not sure it’s a coincidence but a follow up on last night’s rumour, now confirmed, about Google’s launch of Google Apps Premier Edition.

Besides the news fanfare, I am afraid there isn't much new technology onto Google's announcement, but a rebranding of the existing Google Apps for your Domain (GMail, Google Calendar, and Google Talk) joined with Google Spreadsheet and Docs.

But there is a significant point to take into consideration with Google's announcement, and that is price, with the Premier Edition account being offered at $50/year subscription for 10Gb and a 99.9% SLA for email.

As we discussed back in August when looking at the SaaS pricing models, the SaaS model addresses the challenges small and medium businesses IT departments face to provide cost-competitive secure and reliable infrastructure to the business. As such, the low-cost, enhanced mobility, enforcable SLA, and improved security present in SaaS are very attractive factors to the business, to the extent of possibly threatening IT departments with closure.

Taking cost into account, Google is pricing Apps Premier at $50/year/user account, which is just over $4/month, significantly under what other SaaS are currently charging. As we discussed then, the current pricing model of other providers, resulted in a magic number of roughly 500 employees upto which SaaS is more attractive than inhouse hosted software. But Google's pricing model highly undermines that, and pushes that boundary all the way up to almost 15,000 employees. It's this aggressive pricing which is likely to make this offering succesful, and where Google will leverage economies of scale to make a good profit.

We know Google Apps is competitive against inhouse software for businesses upto 15,000 employees, but how does it leave its competitors?

Let's first look at the storage costs, by comparing it with the best online secure storage infrastructure, Amazon S3:

  • $0.15 per GB-Month of storage used.
  • $0.20 per GB of data transferred.

Typically in a hosting business you oversell, and you don't actually need all the storage you sell since most users never consume their quota. I don't expect users of Google Apps to be any different. Assuming a utilisation of 50%, which means an actual use of 5Gb per month per user, and a data transfer of 1Gb/month/user, the total yearly cost with S3 would be $11.4/year/user, or $11,400 for 1,000 employees.

That's for storage alone. In terms of servers, using this time Amazon's EC3 virtual hosting, at $0.10 per instance-hour consumed, the CPU cost of a 24x7 server would be $876/year. EC3 VPS is equivalent to an 1.7Ghz x86 processor, and assuming we can host 10 users on each server, an organisation of 1,000 employees should be able to run on a $87,600 budget.

Considering only infrastructure costs, and taking application costs aside, a 1,000 employee organisation would spend almost $100,000 on an outsourced hosted model, versus $50,000 with Google, but this time application included. It's hard to arguee that Google's is not a very interesting proposition thanks to its extremely aggressive pricing.

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