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SaaS COGS For VPEs: How To Help C-Suite Understand Important Metrics

|January 22, 2021|

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When you lead engineering for a company running on AWS, every technical decision you make can have an impact on your profit margin.

So, it’s no surprise that many of us are increasingly responsible for answering questions and reporting about cost to our executive teams — and in some cases, the board.

Like anything else in engineering, it can be challenging to translate complex and technical concepts to business leaders. But, with the right framing, you can have productive conversations that lead to better alignment between engineering and the rest of the business. In my experience, positive discussions about cost tradeoffs can help your team make better decisions about everything from roadmap prioritization to pricing models.

I’d like to share some of my recommendations for discussing cost with your leadership team — and hope it might help you have stronger cost conversations.

Speak The Language Of Business

Your exec team does not care how much S3 costs and they don’t want to get into the weeds about how architectural choices from years ago led to the current cost structure. They want to understand things like:

  • How much does it cost to operate each application? Within the application, which features are most expensive to run? Which features do customers (whether internal or external) actually use?
  • How do costs correlate to different engineering teams?
  • How much does it cost to host individual customers and segments? To customers at a particular service tier?
  • How profitable is each product?
  • How can we reduce costs? What are the trade-offs involved?
  • What is our unit cost (e.g., What is our cost per message, transaction, etc.?)

The good news is that as an engineering leader, you’re probably already accustomed to translating technical metrics — whether it’s advocating for a different approach to a roadmap initiative to help you go faster or explaining why your uptime has improved.

These skills will serve you well when it comes time to help your executive team make sense of your costs.

Discussing Trade-Offs And Risks

It’s usually not enough to just give your executive team a list of potential projects to improve cost of goods sold (COGS) and margins, because they won’t have the context they need to help you make a decision — or know if you’re making the right recommendation.

As an engineering leader, it’s your job to remove that uncertainty by providing important context about trade-off and risks.

One of the ways I like to group my projects is with easy to understand grouping like “no-brainer” and “moonshot” projects. If a project takes several staff days and saves 10% on your bill, it’s a no-brainer — and your executives will almost certainly agree.

However, some projects are more speculative in nature, you’re not sure what kind of savings they will produce. It could be that the project has the potential to cut your COGS in half but might also end up being a dead end, those are your moonshots.

For example, you should explain the human resources cost and the roadmap items that might be put at risk. You’ll also need to express any uncertainty around the approach you plan to take. If you only feel 50% sure that your changes will impact cost and performance, it’s better to proactively call that out than embark on your plan then report back on lackluster results.

Not all engineering initiatives are going to be slam-dunks. Part of our job is giving business leaders the information they need to decide which risks are worth it and which are not.

If your engineering team spends three months re-architecting the application and there’s a 50% chance that you’ll save $1 million per month, should they go ahead? If you can improve performance by 50% but it might also increase costs by 30%, is that worth it?

Even with the best data, there will always be uncertainty. I’ve found that it’s key to accurately communicate uncertainty by presenting potential risks and potential benefits of any particular course of action. That way leadership can make an educated decision.

Make Sure You Have The GTM Context

Margin improvement is not just about technical system improvements. It’s important to work with your GTM team leaders, like your CRO or head of product to understand how the products you’re building will be priced and packaged.

Here’s one of the most powerful things you can do: Proactively bring data to the table about cost and utilization, mapped to the business segments they care about.

This allows your team to make joint decisions that maximize margins — and show your team areas for revenue growth they may not have otherwise realized.

For example, let’s say you work for a SaaS company that offers a messaging platform and you allow your customers to backup messages for free, but you identify that storage costs are 30% of your COGS. You will want to use this data have a discussion about whether you should start charging extra for storage — or whether you could reduce the cost of storage with an engineering solution.

These kinds of conversations can have an enormous strategic impact on your business. Not only can you grow your margins and provide direction to your business — but finding a solution that doesn’t involve engineering can help keep new feature delivery on pace, so you can stay competitive.

Don’t Wait For The Crisis

The last point I want to make is that engineering leaders who are able to have successful conversations about COGS don’t wait for a crisis. Cost data is something engineering leaders need to pay attention to continually, and neither engineering leaders nor the exec team should be waiting for crunch time to have a conversation about it.

You and your team need to become experts in the cost data, and the only way to become experts is to pay attention to the data and use it as part of your decision-making on a regular basis.

Ultimately, these are business decisions. The best executive teams make decisions that are deeply informed by data. You need to come to this conversation being able to show, with data, how the technical decisions your organization has made connect to your business results and goals.

The team also needs to have enough information about costs, risks, and trade-offs to make their own contributions, even if they have no idea how your technical system works and wouldn’t know which way is up on an AWS bill.

Cloud Cost Intelligence Can Help

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