Comments on: Running a SaaS Business Costs Money?!? http://www.saasblogs.com/2007/05/06/running-a-saas-business-costs-money/ Understanding the Software as a Service Revolution Tue, 16 Mar 2010 18:57:17 +0000 http://wordpress.org/?v=2.5 By: Eric Novikoff http://www.saasblogs.com/2007/05/06/running-a-saas-business-costs-money/#comment-45058 Eric Novikoff Mon, 12 May 2008 17:43:23 +0000 http://www.saasblogs.com/2007/05/06/running-a-saas-business-costs-money/#comment-45058 As an operations services provider for startups (among others) I see this issue cropping up again and again. Most SaaS startups expect to pay about 10% of revenue for their operations, which as you point out is unrealistically low. I actually spend a lot of time coaching them on their P&L modeling! I think the key to remember is that as the business grows, the operations cost per customer can be driven down by tuning the application and leveraging economies of scale in both hosting cost and labor. The first few customers are going to be the most "painful" from a cost of operations standpoint, and shouldn't be taken as a predictor of the future - unless you fail to attend to optimizing your application deployment over time and of course to growing your business. Even the best operations cost situation doesn't help if you don't have many customers! It definitely pays to utilize pay-as-you-go (utility-billed) services such as the ones we offer to reduce the unused resources you have to pay for. This is especially true at the beginning when you might need three full servers to meet reliability and scalability requirements and 3-5 full time people to get the breadth of expertise and round-the-clock response time to run an enterprise-class data center, even though you're only utilizing at most a tiny fraction of all those resources. You can think of it as a "needs curve" of costs for services you actually need per user which if you fulfilled it by leasing servers and hiring people would have a "costs curve" that went up in big steps, with the area between the costs and needs being unused resources that you're paying for. Eric Novikoff http://www.ComputingUtility.com As an operations services provider for startups (among others) I see this issue cropping up again and again. Most SaaS startups expect to pay about 10% of revenue for their operations, which as you point out is unrealistically low. I actually spend a lot of time coaching them on their P&L modeling! I think the key to remember is that as the business grows, the operations cost per customer can be driven down by tuning the application and leveraging economies of scale in both hosting cost and labor. The first few customers are going to be the most “painful” from a cost of operations standpoint, and shouldn’t be taken as a predictor of the future - unless you fail to attend to optimizing your application deployment over time and of course to growing your business. Even the best operations cost situation doesn’t help if you don’t have many customers! It definitely pays to utilize pay-as-you-go (utility-billed) services such as the ones we offer to reduce the unused resources you have to pay for. This is especially true at the beginning when you might need three full servers to meet reliability and scalability requirements and 3-5 full time people to get the breadth of expertise and round-the-clock response time to run an enterprise-class data center, even though you’re only utilizing at most a tiny fraction of all those resources. You can think of it as a “needs curve” of costs for services you actually need per user which if you fulfilled it by leasing servers and hiring people would have a “costs curve” that went up in big steps, with the area between the costs and needs being unused resources that you’re paying for.

Eric Novikoff
http://www.ComputingUtility.com

]]> By: Matt Robinson http://www.saasblogs.com/2007/05/06/running-a-saas-business-costs-money/#comment-17389 Matt Robinson Sun, 14 Oct 2007 20:26:49 +0000 http://www.saasblogs.com/2007/05/06/running-a-saas-business-costs-money/#comment-17389 This is particularly helpful as I embark on a P&L modeling excercise. Have folks here found that CoR is the most useful metric to pay attention to? My current models suggest overwhelming economies of scale and I imagine this should be more or less true for any pure multitenant SaaS vendor. Yet you say "rudimentary evidence for economies of scale" -- curious if there is any evidence to the contrary? Matt Robinson www.rollbase.com Roll your own business apps This is particularly helpful as I embark on a P&L modeling excercise. Have folks here found that CoR is the most useful metric to pay attention to? My current models suggest overwhelming economies of scale and I imagine this should be more or less true for any pure multitenant SaaS vendor. Yet you say “rudimentary evidence for economies of scale” — curious if there is any evidence to the contrary?

Matt Robinson
http://www.rollbase.com
Roll your own business apps

]]> By: En Avant » Blog Archive » SaaS business blog http://www.saasblogs.com/2007/05/06/running-a-saas-business-costs-money/#comment-5787 En Avant » Blog Archive » SaaS business blog Thu, 24 May 2007 15:38:42 +0000 http://www.saasblogs.com/2007/05/06/running-a-saas-business-costs-money/#comment-5787 [...] Running a SaaS business costs money? Trackback uri [...] […] Running a SaaS business costs money? Trackback uri […]

]]> By: SaaS Blogs - » On User Density http://www.saasblogs.com/2007/05/06/running-a-saas-business-costs-money/#comment-4493 SaaS Blogs - » On User Density Tue, 08 May 2007 13:54:41 +0000 http://www.saasblogs.com/2007/05/06/running-a-saas-business-costs-money/#comment-4493 [...] My last post discussed cost of revenue related to delivering a SaaS-offering to a subscriber base. Shortly after publishing it, I noticed that Gianpaolo Carraro posted this article, which toward the end discussed the relationship between cost and electricity/space within a datacenter. A while back, Gianpaolo described another metric: tenants per database and he described it as “density.” I think that really summarizes the electricity/real estate metric and is the best way to look at any SaaS metric. Drive cost of revenue (and even operational costs) down: maximize your density metrics. As a SaaS provider, you need ot identify any “Users per X” or “Tenants per Y” and figure out ways to make that ratio bigger. Doing so will improve cost predictability, buffer against sudden cost change (distribution property), and most importantly it will build your economies. Changing these ratios isn’t easy, however. Most of the time, good density is achieved through advanced application architectures, good infrastructure configuration, etc. Tags:   These icons link to social bookmarking sites where readers can share and discover new web pages. [...] […] My last post discussed cost of revenue related to delivering a SaaS-offering to a subscriber base. Shortly after publishing it, I noticed that Gianpaolo Carraro posted this article, which toward the end discussed the relationship between cost and electricity/space within a datacenter. A while back, Gianpaolo described another metric: tenants per database and he described it as “density.” I think that really summarizes the electricity/real estate metric and is the best way to look at any SaaS metric. Drive cost of revenue (and even operational costs) down: maximize your density metrics. As a SaaS provider, you need ot identify any “Users per X” or “Tenants per Y” and figure out ways to make that ratio bigger. Doing so will improve cost predictability, buffer against sudden cost change (distribution property), and most importantly it will build your economies. Changing these ratios isn’t easy, however. Most of the time, good density is achieved through advanced application architectures, good infrastructure configuration, etc. Tags:   These icons link to social bookmarking sites where readers can share and discover new web pages. […]

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