DigitalOcean Holdings (DOCN +5.93%) plays a different game than Amazon Web Services and the other giant cloud platforms. A small set of core cloud computing products, simple pricing with no surprises, free support and resources, and an easy-to-use platform have attracted around 623,000 customers. AWS has become the default choice for many, but it's often not the best choice for developers and small businesses.
DigitalOcean's customers skew small. Average monthly revenue per customer was less than $70 in the most recent quarter. That number has risen over time as DigitalOcean has introduced new products, including its App Platform and managed MongoDB databases. But it's not a stretch to say that DigitalOcean's customer base is going to be somewhat fickle, at least compared to enterprises spending big on AWS.
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Higher prices are coming
While DigitalOcean isn't known for being the absolute cheapest cloud computing option, value is a core part of what it offers. A basic virtual server can be created for $5 a month, the company undercuts AWS by offering cloud storage for $0.02 per gigabyte, and managed databases start at $15 per month. A developer can spin up resources quickly and cheaply, scaling up as necessary with the click of a button.
On July 1, DigitalOcean will become a bit less affordable. The company is implementing price increases across many of its products, and existing customers won't be spared. DigitalOcean is banking on its customer base accepting the higher prices without much fuss.
Basic virtual servers will be around 20% more expensive. That $5-per-month product will jump to $6 per month, and pricing for all higher-priced options will rise by between 17% and 20%. More specialized virtual servers will see smaller price bumps, although these products are much more expensive to begin with.
Various other products will become pricier as well. Load balancers, which spread traffic across multiple virtual servers, will see a 20% price increase. Some managed database configurations will get more expensive, although not all.
Some pricing will be unchanged. Costs for excess bandwidth will remain the same, and cloud storage will keep its $0.02-per-gigabyte pricing. Pricing for the App Platform, DigitalOcean's platform-as-a-service offering, is staying put as well.
One silver lining for customers is the introduction of a new $4-per-month virtual server. This new option comes with lower memory, storage, and bandwidth, but it provides a low-cost way for developers to test applications before deploying them on more capable hardware.
DigitalOcean is using improvements to its platform and infrastructure to justify the higher prices. The company specifically noted a serverless computing product, enabled by the acquisition of Nimbella, that will be launching soon.
NYSE: DOCN
Key Data Points
Watch out for churn
Customers are rarely happy about prices going up. DigitalOcean has never attempted to raise prices before, so this is uncharted territory for the cloud computing provider. The immediate effect will be a sizable boost in average revenue per customer. Since the price increase covers all virtual servers, most customers will feel it on their bills.
Around 84% of DigitalOcean's revenue comes from customers spending more than $50 per month. These customers may be less likely to consider alternatives in the wake of this price increase. As a customer uses more resources, switching costs grow as the hassle to move those resources increases.
It's the smaller customers that are most at risk of fleeing. A customer only running a few virtual servers may decide that a few dollars a month is enough reason to switch providers. There are plenty of other platforms that aim to offer a DigitalOcean-like experiences. Privately held Linode and Vultr are two, and both will beat DigitalOcean on price once this increase goes into effect.
With that being said, the price increase will likely be a net positive for DigitalOcean. The company may lose some customers, but many more will be happy to pay higher prices for the simplicity DigitalOcean offers. And once the serverless computing product rolls out, DigitalOcean's platform will have a compelling new option that makes it even more attractive to developers.
