DigitalOcean will test customer loyalty with a 20% price increase

DigitalOcean Holdings (NYSE: DOCN) play a different game than Amazon Web Services and other giant cloud platforms. A small set of basic cloud computing products, simple pricing with no surprises, free support and resources, and an easy-to-use platform 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 are small. Monthly average revenue per customer was less than $70 in the last quarter. This number has grown over time as DigitalOcean has introduced new products, including its application platform and managed services. MongoDB data base. But it’s no exaggeration to say that DigitalOcean’s customer base is going to be somewhat temperamental, at least compared to companies that spend heavily on AWS.

Image source: Getty Images.

Higher prices are coming

While DigitalOcean is not known to be the absolute cheapest cloud computing option, value is at the heart of what it offers. A basic virtual server can be created for $5 per month, the company discounts AWS by offering cloud storage for $0.02 per gigabyte, and managed databases start at $15 per month. A developer can increase resources quickly and inexpensively, increasing as needed with the click of a button.

On July 1, DigitalOcean will become a little less affordable. The company is implementing price increases on many of its products, and existing customers won’t be spared. DigitalOcean relies on the fact that its customers accept the higher prices without too many problems.

Basic virtual servers will be around 20% more expensive. This $5 per month product will increase to $6 per month, and the prices of all the most expensive options will increase by 17% to 20%. More specialized virtual servers will experience less significant price increases, although these products are much more expensive to start with.

Various other products will also become more expensive. Load balancers, which distribute traffic across multiple virtual servers, will see their price increase by 20%. Some managed database configurations will become more expensive, but not all.

Some prices will remain unchanged. Excess bandwidth costs will remain the same and cloud storage will retain its price of $0.02 per gigabyte. Pricing for the Apps Platform, DigitalOcean’s platform-as-a-service offering, also remains unchanged.

A silver lining for customers is the introduction of a new virtual server at $4 per month. This new option offers less memory, storage, and bandwidth, but it gives developers a low-cost way to test applications before deploying them to higher-performance hardware.

DigitalOcean uses improvements to its platform and infrastructure to justify the higher prices. The company specifically noted a serverless computing product, made possible by the acquisition of Nimbella, which will be launching soon.

Beware of unsubscribing

Customers are rarely satisfied with the price increase. DigitalOcean has never attempted to raise prices before, so this is uncharted territory for the cloud provider. The immediate effect will be a dramatic increase in average revenue per customer. Since the price hike affects all virtual servers, most customers will feel it on their bills.

About 84% of DigitalOcean’s revenue comes from customers spending more than $50 per month. These customers may be less inclined to consider alternatives as a result of this price increase. As a customer uses more resources, switching costs increase as the hassle of moving those resources increases.

It is the small customers who are most at risk of fleeing. A customer who only uses a few virtual servers may decide that a few dollars a month is reason enough to switch providers. There are many other platforms that aim to deliver DigitalOcean-like experiences. Private companies Linode and Vultr are two, and both will beat DigitalOcean on price once this increase takes effect.

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 of DigitalOcean offerings. And once the serverless computing product is deployed, DigitalOcean’s platform will have a compelling new option that will make it even more attractive to developers.

10 Stocks We Like Better Than DigitalOcean Holdings, Inc.
When our award-winning team of analysts have stock advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*

They have just revealed what they believe to be the ten best stocks for investors to buy now…and DigitalOcean Holdings, Inc. wasn’t one of them! That’s right – they think these 10 stocks are even better buys.

View all 10 stocks

* Portfolio Advisor Returns as of April 7, 2022

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Timothy Green has no position in the stocks mentioned. The Motley Fool holds and recommends Amazon, DigitalOcean Holdings, Inc., and MongoDB. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Joseph P. Harris