The Integral Role of Cost to Serve in FinOps

In the dynamic realm of software as a service (SaaS), understanding your Cost to Serve (CTS) is comparable to navigating through uncharted waters. This critical metric functions as the compass that assists in determining the costs involved in delivering your product to customers. Join us on this exploration as we delve into the intricacies of CTS and examine why it holds a pivotal position in the domain of FinOps, guiding your organisation towards financial success.

The Hidden Gem: Cost to Serve (CTS)

What precisely is Cost to Serve, you may ask? It is an often overlooked yet crucial metric. CTS is the measurement of the comprehensive expenses associated with delivering your product, encompassing various aspects from account management to software upgrades and maintenance. Why does it matter? Understanding the true cost of serving diverse customer segments empowers you to optimise your pricing strategy and, consequently, maximise profitability.

Strategising with FinOps: How to Innovate Without Increasing CTS

As your SaaS organisation embarks on a journey of innovation, the challenge lies in optimisation without inflating your Cost to Serve. Here are strategic tips to navigate these waters with FinOps:

1. Adopt Lean Thinking Across the Organisation

Promote a culture of lean thinking, extending from the go-to-market function to product, customer success, and beyond. Analyse data to identify opportunities for maximising ROI, ensuring resources are allocated to features that resonate with customers.

2. Rethink Budget Allocation for Greater Scalability

Resist the temptation to follow a one-to-one relationship between headcount increases and scale. Encourage departments impacting CTS to allocate budgets in scalable ways, emphasising efficiency over new hires.

3. Champion the Customer in Every Decision

Foster a culture where prioritising the customer is a shared responsibility. Regularly gather feedback to discern which product features are effective and prioritise high-impact areas to keep the cost of service low.

4. Review Cloud Usage with FinOps

Maintain cost efficiency by optimising cloud usage with FinOps. Strategies such as auto-scaling and adopting serverless architectures can result in significant cost savings. The success story of Ajay Vashee, former CFO of Dropbox, doubling gross margins by moving out of the public cloud, highlights the impact of FinOps.

Unveiling the Treasure Map: How to Calculate and Analyse CTS with FinOps

Calculating CTS is not a one-size-fits-all endeavor. It requires a thoughtful approach tailored to your business and its scope. Follow these steps using the FinOps framework:

1. Identify Direct and Indirect Costs:

• Direct costs encompass customer success and support headcount, product maintenance, upgrades, and cloud infrastructure.

• Indirect costs cover research and development (R&D), general and administrative (G&A) expenses, and other supporting costs.

2. Total Cost of Service Calculation:

• Sum up direct and indirect costs to determine your total cost of service.

3. Cost to Serve Formula:

• CTS (Per Customer) = Total Cost of Service / Number of Customers.

Putting It to the Test: Cost to Serve Example with FinOps

Consider a scenario where you operate a SaaS company offering business task management software. Your direct costs for the year were $300,000, and indirect costs totaled $200,000. With 10,000 active subscribers, your CTS per customer was $50.00. With the strategic adoption of FinOps. you can Benchmark this, analyse trends, and devise a pricing strategy for a competitive yet profitable landscape.

In the ever-evolving world of SaaS, mastering the art of Cost to Serve analysis serves as a compass to navigate successfully. Armed with insights, innovation, and the strategic power of FinOps, your organisation can progress towards efficiency, profitability, and the commendation of your stakeholders.