When each quarter’s financial report lands on the desks of a company’s C-Suite executives, those execs are essentially looking at a black box of spending and revenue.
They can see the total numbers and the growth or shrinkage of certain categories, but they ultimately have very little context into why each number is as high or low as it is. Without this context, it’s all too easy to feel sticker shock over a seemingly outrageous cloud bill and demand that costs be cut at once.
However, as many SaaS companies have learned the hard way, slashing cloud budgets isn’t always the best strategy, and may actually have a negative impact on the health of the business.
That’s why it’s so important to perform a detailed cloud cost analysis to determine the return on investment (ROI) of each cloud service utilized by the company. Only when executives understand where the cloud budget is going and how that spending affects revenue, customer retention, and overall profitability can they make educated decisions about how to streamline operations, look for new opportunities, and make other crucial decisions about the company’s future.
But how do you actually calculate ROI on cloud computing? And once you do, how do you present it to the C-Suite in a way that gives them the information they need to make sure the company keeps evolving in the right direction?
While your exact calculations and presentation methods will vary based on your company, industry, and unique situation, the following guidelines should get you started.
How To Calculate And Present ROI On Cloud Computing To Your Company’s Executives
Running the numbers
Coming up with a number that represents your company’s cloud computing return on investment is essentially a way of measuring the efficiency of your cloud investment. To do this, you’ll need to keep track of the unit economics for each cloud product and feature you pay for, and the revenue generated by each as well.
It can be very tough to track these metrics without an in-depth cost intelligence strategy, and the platform and services offered by CloudZero. CloudZero gives you access to visible, easily understandable measures of unit economics you can use as the basis for all your cost-related calculations and decisions.
Once you have a system in place to track your unit economics, you can compare and contrast important metrics.
Primarily, you’ll be focusing on two areas:
- The revenue you can expect from a service in comparison to the costs required to provide that service
- The time it will take to break even on your R&D investments
Because SaaS companies often offer multiple products and features and may contract with multiple cloud service providers, you’ll likely be running these comparison calculations for a variety of different items.
You may find, for example, that although setting up an account tier with unlimited messaging would cost more per month than you’re currently paying for capped messages, the revenue gained by allowing high-dollar customers to send and receive as many messages as they want far outweighs the monthly payments.
While the most obvious metrics to compare are costs and revenue for each cloud service you use, don’t forget about other measures of success as well. Customer happiness and retention, for example, may be dramatically affected if your company switches from one cloud service to another, even if the math on cost versus expected revenue checks out.
Similarly, it may appear at first that switching to another service would save money per transaction, but if you’ve built an established relationship with your current provider, you may be able to negotiate discounted rates that more than makeup for the difference in transaction costs.
Showing your results to the C-Suite
C-Suite executives aren’t going to care so much about the detailed ins and outs of where each dollar goes within your cloud bill.
Most of the time, they just want to make sure those dollars are going toward worthwhile things that bring more revenue to the company and improve the user experience for customers. They also want to keep track of the margin between total costs and profits to make sure the margin stays healthy and strong.
Therefore, it’s always a good idea to have that detailed breakdown of costs on hand. Remember, these executives have to make critical decisions regarding the future direction of the company, so it’s important they have all the information they need at their fingertips.
Thankfully, if you’ve done a thorough enough analysis to come up with the unit economics of each feature you’re paying for and the revenue you can expect in return, it won’t be too hard to put that analysis down on paper for the C-Suite to read.
Include each metric you’ve tracked, as well as your analysis of how each metric relates to the others. This will allow the C-Suite to see at a glance how changing one area might affect the others.
As an example, let’s say your analysis determined that although your company charges per customer account, your costs vary most heavily based on the amount of storage each customer uses. Therefore, you might have much larger margins for low-storage customers, while your customers that utilize lots of storage leave you with razor-thin margins.
Is it better to restructure your entire pricing strategy or leave things as-is with the understanding that, on average, the numbers fall within an acceptable range? Another option might be to charge extra for users who exceed a certain storage threshold.
This may be a scenario where there is no right or wrong answer, but the point is, the executives and other decision-makers should have all the data they need to make an educated decision and determine a course of action.
Another example: Let’s say you have a great idea for a new feature. It will take a rather shockingly large up-front budget to develop this new feature, but you anticipate that it will pay for itself within the first year. It’ll be much easier to sell that idea to the C-Suite if you have hard numbers to back up your projections.
Bundle each section of your analysis into a clearly documented, organized report, and include data visualizations that make each section quick and easy to read.
Importantly, be prepared to answer questions about how you chose the metrics, gathered the data, ran the numbers, and arrived at your conclusions.
Still Not Sure Where To Start?
If your company doesn’t have a solid cost intelligence strategy already in place, you might be facing more of a challenge than you’re prepared for. After all, it’s hard to calculate ROI when you have no visibility into your costs, revenue, and the unit economics of each cloud service.
Instead of trying to create something out of nothing, let CloudZero open a window into the previously opaque black box of your company’s finances. Helping SaaS companies achieve cost visibility is what we do.
When in doubt, you can even partner with a FinOps specialist who will coach you through devising a cost intelligence strategy that works for your business.