Rackspace (RAX) is locked in a nasty cloud services price war vs. Amazon Web Services (AMZN), Microsoft (MSFT) Windows Azure and Google Compute Engine (GOOG). Each time Amazon slashes AWS cloud prices, Rackspace responds in kind. How can Rackspace break out of that potential death spiral? Simple: Start acting like Nordstrom (JWN) rather than Wal-Mart (WMT). Here’s why.

Question: What is Rackspace’s greatest asset? Some pundits may say OpenStack — the public and private cloud software standard. But The VAR Guy’s opinion is vastly different. The real differentiator is Rackspace Fanatical Support. When it comes to customer support, the cloud services provider is known for (A) rapid response (B) and call centers that are staffed with true experts.

The VAR Guy has used a range of Rackspace hosting services since around 2009. And the Fanatical Support commitment is real. 

In stark contrast, Amazon is not very well known for customer support. Like an electric utility, Amazon tries to keep the power on. But if the power goes off, you’re basically in the dark (for the most part) until Amazon restores service. Moreover, neither Amazon nor Windows Azure have particularly strong reputations for small business customer support. 

You can bet Amazon will offer rapid response to Netflix — one of its largest cloud customers. But will tiny video service providers receive that same level of support on Amazon? Doubtful.

In stark contrast, Rackspace phone support picks up super-fast no matter how large or small your business is. Those operators typically route customers to experts who understand and troubleshoot database, network, storage, compute and cloud issues. 

Most impressive: Rackspace Fanatical Support is essentially free with the company’s cloud and hosting services.

This Makes No Sense

And therein lies the rub: For some strange reason Rackspace is trying to compete with Amazon on price — the Wal-Mart model. Instead, Rackspace should compete on customer service — the Nordstrom model. 

Surely, there’s a class of cloud customer that’s willing to pay a price premium for Rackspace Fanatical Support. Go find those premium customers, Rackspace. And stop trying to compete with Amazon on price — which is no-win scenario for you and your long-term investors (including The VAR Guy, who remains long on RAX shares).