You you were asking how someone can compete who has their own data center presumably. I take it you also have one? If not then colocation may be something to consider.

Only you will know whether it's in your interest to subscribe to a cloud or own your stuff. If they are offering server 2016, it seems to me they are not using azure. There's going to be capital cost, and then colocation recurring which in 800km of my area are between $200-$500/mo. After that, whether you have on site back ups at the colocation facility and or offer all the same features is your call. It gets a little complex because you probably don't want all your eggs in one basket on one server. This will mean HA, a SAN, separate on-site backup appliance then maybe consider the site your colocation is at going down, so planning for offsite redundancy may be a factor. This all means again, capital. All the equipment that you do buy for that project should include at minimum three-year warranty's. After all this, your only monthly bill is renting the Colo and then you too, can charge $200 a month to do what they are doing. Eat the cost of all the work and hardware you procured to look at instant profit. $$$

This cloud they are talking to is someone else's server like azure would be.

Seems to me that they will make money if the client stays for any length of time past six months say for example.