Adopting Infrastructure as a Service (IaaS) for your SaaS business could dramatically reduce costs, increasing customer lifetime value and helping you achieve or grow profitability.
SaaS profitability is commonly assessed in terms of the ratio between Customer Acquisition Cost (CAC) and customer Lifetime Value (CLV), the rule of thumb being that a CLV > 3x CAC is the sign of a healthy SaaS business.
Clearly then, increasing CLV and reducing CAC leads to greater profitability per customer and a more profitable business.
If you now go and look for insight into how to increase CLV, the emphasis will nearly always be on increasing the revenue per customer through service expansion or clever marketing tricks. But buried in the calculation of CLV is the cost of servicing each customer and, within this, the cost of hosting. This is potentially far easier to control and could mean the difference between positive and negative profitability per customer.
As Dave Key writes in The Imperative to Reduce the Cost of SaaS Service, the opportunity to improve profitability by reducing the cost of servicing customers is often overlooked, meanwhile much attention is paid to customer acquisition and the product’s ability to generate revenue – not that these should be forgotten of course.
Key goes on to say that a core component in service cost reduction is hosting efficiency and that this can be maximised by optimising your choice of platform and vendor to closely match your business’ requirements and capabilities.
The hosting stack and hosting efficiency
Where you decide to operate on the hosting stack directly affects the costs you incur. Higher levels on the stack reflect increased value add, in terms of management and/or development environments, by the vendor and thus greater unit costs. I.e. Platform as a Service (PaaS), with its added development tools, will cost you more than the simpler Infrastructure as a Service (IaaS).
Maximising hosting efficiency isn’t just a case of choosing the platform with the lowest cost per unit of compute, however. While stepping down the stack invariably bestows greater control and lower costs, it also comes with a corresponding administrative burden that must be managed by your devops teams.
If your team is comfortable with, or even desires, greater control over the infrastructure powering your application, moving down the stack is a sound choice. Taking on hosting administration responsibilities that your teams can’t handle, however, could lead to problems with availability or worse, security, and should be avoided.
IaaS – the bottom of the stack
With IaaS, your vendor provisions the resources required to run your application, including compute, storage, networking, etc. Meanwhile, you have the freedom to configure these resources as you wish. Your developers can fine tune IaaS to the needs of your application and its users, all while keeping platform costs to a minimum.
If your devops teams are capable of architecting and orchestrating the underlying resources you need to deliver your application, IaaS will offer you the lowest cost point and make a greater contribution to profitability than other platforms.
Virtual vs. dedicated – the rise of bare metal cloud
The term IaaS frequently describes virtualised service offerings. While assuring you a lower cost point than PaaS solutions, virtual IaaS still incorporates a layer of abstraction, which comes at a cost and leaves some control in the hands of the vendor – machine density for example.
Bare metal cloud, which has been made possible through advances in automated provisioning, is, in a sense, a true IaaS wherein you are provided with the physical, dedicated servers required to build your desired environment.
On a bare metal cloud you have absolute control over every aspect of your hosting efficiency, right down to machine density, and can therefore be sure of optimising cost and profitability.
If you want to maximise the profitability of your SaaS business and your devops teams are up to the challenge, adopt IaaS (or, even better, bare metal cloud) to reduce your hosting costs and the costs of servicing each customer.
By managing your hosting and other costs well, any effort you put into increasing revenue per customer and reducing CAC will be doubly effective.