With Cloud becoming the operating word, many Purchasing Managers have to deal with a variety of contracting types. At a basic level, there are two kinds - subscription contracts and consumption contracts.
Subscription contracts require you to commit to a certain volume upfront for the contracting period. This does not depend on the actual consumption. In contrast, consumption contracts let you pay based on the actual consumption.
On the face of it, it looks like Consumption Contracts are better. However, consumption contracts come at a premium. The question is - how much of the premium is justified for the consumption contracts given certain demand uncertainty?
This is a basic model that lets you understand the dynamics. The demand has uniform distribution between a minimum of 90 and a maximum of 100. Subscription contract is priced at a monetary unit of 100. Consumption contracts command a premium for the flexibility they are offering. You can play with the premium (it is a premium you are paying over 100) by moving on the slide bar and see how the costs of subscription and consumption are shaping up.
Hope you enjoy it.
