Explained: TCO in a SaaS business
Mainly Infrastructure, Onboarding and Support.
What is TCO?
TCO, Total Cost of Ownership, is the cost of serving customers. It only includes costs that directly serve the customer. Not indirect costs e.g. administrative roles. TCO can be used to calculate the profit margin aka “cloud margin” of a SaaS app; Cloud Revenue - TCO = Cloud Margin.
Main components (% TCO)
Infrastructure cost (30%). What is it? This is the cost of running a SaaS app in a Data Center. Why is it needed? It provides the storage and compute power for the app. The most common Infrastructure as a Service or “IaaS” providers are Amazon AWS (50%), Microsoft Azure (25%), Google GCP (25%).
Onboarding/Enablement/Consulting cost (25%). What is it? This is the cost of teaching and configuring the app for the customer. Why is it needed? SaaS apps are one-size-fits-all or “standardised” and therefore offer many custom configurations/add-ons since customers have specific needs. This gets complicated and requires expensive consultants, training material, and guidance to configure the app.
Support cost (20%). What is it? This is the cost to handle 1) customer tickets, phone calls aka “Product Support” and 2) fix software updates aka “Development Support”. Why is it needed? Given that a SaaS app is “standardised”, customers will 1) request new features/add-ons to meet their needs, 2) need guidance adapting to new software updates aka “releases” and 3) might need bug-fixes after a software release, aka “hot-fixes”.
Centrally Provided Services cost (15%). What is it? This is the cost of using internal tools used by the SaaS app team. Why is it needed? Sometimes custom tools/services are built by the SaaS app team for the SaaS app team to 1) solve specific problems in the SaaS app, 2) improve productivity of internal developers.
Application Mgmt. (10%). What is it? This is the cost of 1) cloud operations or “CloudOps” personell, and 2) monitoring/analytics tools and dashboards. Why is it needed? To improve efficiency in Data Center operations. Similar to how “DevOps” is a methodology to improve app development, CloudOps is a methodology to improve cloud processes via analytics/monitoring tools to check cloud Data Center outages etc.
