It Doesn’t Matter How Much You Spend on AWS
Focusing solely on reducing your cloud spending won’t get you anywhere. At the end of the day, what matters most is profitability.
When it comes to cloud cost management, the conversation usually revolves around reducing costs. After all, cloud bills are often the second biggest expense for SaaS companies and managed service providers (MSPs), so it’s understandable that such businesses want to keep their costs low.
But simply cutting your cloud costs may not be a good long-term strategy. It can lead to a decline in quality, limit your ability to scale and stifle innovation, all of which harm profitability. The real question you should be asking is how cost-efficient and profitable your infrastructure is. That’s the top-level question that FinOps aims to address.
Focusing on Cost Efficiency and Profitability
For a long time, start-ups have been hyper-focused on growth. But growth doesn’t necessarily translate into profitability. Businesses that are only focused on growth risk becoming victims of their own success, simply because cloud spend becomes far too complex to manage efficiently without extra help.
If you’re thinking about positioning your business for funding, you need to start prioritizing the profitability of your business model, rather than simply growing your annual revenue. Failing to establish a fine-tuned balance between operational costs and profitability is one of the most common reasons why most start-ups fail — around 90% according to some sources.
When it comes to cloud costs, it’s only natural that your bills will increase as you onboard more customers. In many cases, this is a sign your company is becoming more profitable. Alternatively, the opposite might be the case, and even though your bills are increasing, your profits are stagnating — or worse — shrinking. To determine where your business currently stands, as well as where it’s likely to be in the foreseeable future, you need to think about business context when evaluating and optimizing your cloud spend.
A healthy business environment should see profitability increasing in line with cloud spend. If they’re diverging too much, then business continuity could be at risk, while if they’re getting closer together, your profitability will be reduced.
Looping Engineering Teams into Business-Level Conversations
Most SaaS companies have a mature engineering model, in which development and operations are no longer siloed but instead, work together across the entire application delivery pipeline. An effective engineering team iteratively builds, tests and releases SaaS products based on a continuous feedback loop. As such, in any SaaS company, the entire customer experience and, therefore, the profitability of each customer all circle back to the activities of the engineering team.
The problem is that, in many organizations, engineering has itself become a siloed department — one that tends to be strictly focused on the technical expertise that goes into developing and maintaining modern SaaS products. Most engineering teams pay little attention to things like cloud spend, instead relying on finance teams to set their budgets.
To build a more sustainable and cost-efficient business model, engineering needs to be included in high-level conversations surrounding cloud spending and profitability. Engineering teams need to understand their cloud spending, along with their unit economics. For example, they need to know how much it costs to deploy specific services and features, in order to know whether or not they’re profitable. They need a granular view of their cloud spend to answer questions such as:
- What are the costs associated with our current cloud setup?
- How much does a specific product, service, feature, or customer cost to maintain?
- Are these products, services, features and customers profitable?
- Is our Azure bill higher because we’re growing or because we’re overspending?
- How can we handle resource provisioning and cloud cost forecasting?
Once engineering teams are able to understand their impact on profitability, they can contribute to high-level discussions surrounding business growth. In other words, they don’t just develop SaaS products — they develop efficient SaaS products, and that’s what the FinOps model is all about.
In today’s economic climate, the companies that thrive are those making data-driven business decisions as a unified team operating under a common goal. No longer can businesses afford to operate in silos, and the days of reckless spending and hyperfocus on growth are long gone. Investors are no longer interested in company size alone — they want to see a profitable business model that strikes a balance between sustainability and revenue.
In conclusion, SaaS start-ups must be mindful to avoid focusing purely on reducing costs, no matter how tempting it might be given the troubling economic climate. Instead, decision-makers must acquire a more nuanced understanding of the profitability of their business models. That’s what makes the FinOps framework a vital resource for today’s service-based cloud business models.