When you work in tech, there are certain truths about the holiday season you can always count on.
For example, you’ll be holding your breath up until New Years waiting to see if deals will come across the line. The end-of-year planning you intended to have done by December 31, will inevitably bleed into January. And, without a doubt, you’ll spend your holidays trying to explain to your relatives what exactly it is that you do.
This year, as I found myself explaining once again that — yes, Amazon sells more than just the things you order on Prime and no, it’s not just like the cloud on your iPhone — I started thinking about how strange this industry we work in really is.
But in the process of explaining to outsiders why companies need the product I sell (a cloud cost intelligence platform), it occurred to me that the things we accept as normal, would not be normal in any other industry.
In high school, I worked at a bakery — so my go-to metaphor when I’m explaining cloud cost problems to non-technical outsiders is always to compare it to that business, which I know everyone can understand.
This year, it got me thinking — what if we ran our bakeries like we run our SaaS companies?
So, in honor of the recent holiday season and new year, here are a few musings, which I think put into perspective just how unusual our industry is — and in turn, why our approach to cost optimization could use a little rethinking.
We’d Track The Cost Of Eggs, But Not Chocolate Chip Cookies Or Wedding Cakes
In SaaS, we often report on “hosting costs” in a big bucket — or maybe how much we spend monthly on just EC2. But EC2 is an ingredient — not a product.
In a bakery, this would be like tracking how much we spend monthly on eggs — eggs which then go into everything we make, from wedding cakes to chocolate chip cookies.
We’d negotiate with the egg company on egg savings plans and commit upfront to buy more eggs next year for a higher discount.
We might even buy software that automates the brand of eggs we buy based on which eggs are cheapest that day or offer better volume discounts.
We would have no idea what our profit margins on different products were or which customers had higher ROI. As a result, we wouldn’t know whether we should spend our marketing dollars on PTA parents prepping for bake sales or at wedding expos. We might even be selling the chocolate chip cookies at a loss — but who would know?
At work, when I meet engineering and finance leaders, many of them talk about how their cloud bill is going up, but they’re not sure what they’re spending it on. Imagine how much more strategic those businesses could be if they knew exactly what every customer or product feature cost at any given time? Or how much cost a particular customer was driving on a single feature?
Everything from the marketing segment they go after to their discounting floors might be different.
We’d Let The Bakers Pick The Most Expensive Ingredients
When we’re building software, we let the engineers choose the services they need to get products out the door quickly — as long as they make sure it’s resilient and secure.
Imagine if we told our bakers to use whatever high-quality ingredients they want?
Don’t worry about cost — thinking about it will slow you down! You want to use Saffron and fresh Tahitian vanilla? Go for it. Lock the recipe in. The margins will correct themselves later when we bake higher volumes of cookies.
At SaaS companies, teams often won’t consider cost at all during development. This is especially true for earlier stage companies, who assume their margins will correct themselves later as they scale (which is often not true).
Last year, I spoke with CloudZero customer Ben Johnson, who previously founded Carbon Black and most recently co-founded Obsidian Security. As a seasoned entrepreneur, he understood the importance of paying close attention to cost and gross margin as early as possible, so he could scale his business with healthy margins. You can hear him talk about it here.
It’s always surprising to me how few SaaS leaders think like Ben in the early stages of their businesses. Companies who consider consider cost while they’re formulating the recipes — whether it’s cookies or code — can deliver high quality products that also drive positive business outcomes.
We’d Sell A Box Of Cookies, Then Get Charged For Each One Our Customer Ate
In the tech world, we often sell a flat subscription, based on some (often arbitrary) metric like cost per seat. Then, we get charged every time our customers interact, store, download, and stream.
Our profit margin per customer is either a surprise, at best, or a mystery, at worst.
Imagine if every time a bakery sold a cake, they were charged for every slice cut? Wouldn’t we want to consider what each bite cost us? If we sold the cake for $25, then were charged $5 for every cut, wouldn’t we maybe reconsider our pricing model?
It’s not uncommon in SaaS for pricing models to be misaligned with the value they deliver to their customers, and the costs they incur when the product is used. With multi-tenant environments and containerization, it has become increasingly difficult to understand the cost your customers are driving as they interact with your product.
In fact, prior to CloudZero, I worked for at least one company where my team felt fairly certain we might actually be upside down on a few of our customers, but couldn’t prove it one way or another — and I know that’s not that uncommon.
Understanding customer cost, both on average and by account, user, product feature and more, will drive better pricing decisions, renewal conversations, and of course — profitability.
Final Thoughts …
So, before you make your next decision, maybe think to yourself — what if I ran a bakery (or a shoe store, or a construction company). You just might uncover an opportunity to sharpen your business strategy.
And if you’re looking to measure chocolate chip cookies instead of eggs, consider using CloudZero.
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