Unit Economics for a Multi-Product SaaS
A SaaS company offers three products: A, B, and C. Product A is mature and profitable, B is growing but has high cloud costs, and C is a new experimental product with low revenue but high resource consumption. Total monthly cloud spend is $400,000, and revenue is $1.2M. The CFO wants to understand unit economics per product to decide where to invest. The current cost allocation uses a simple revenue-based split, but the engineering team argues that product B and C consume disproportionately more infrastructure. They have data on resource usage (e.g., compute hours, storage GB) but no direct mapping to products. The FinOps team needs to build a unit economics model that accurately reflects costs and identifies optimization opportunities. They have 6 weeks to present findings.
1. How would you allocate cloud costs to products to calculate unit economics? What metrics would you use?
Read the worked answer
Use a hybrid allocation approach:
- Direct costs: Tag resources directly to products where possible (e.g., dedicated databases, storage buckets).
- Shared costs: Allocate based on usage drivers. For compute, use CPU hours; for storage, use GB-month; for network, use data transfer. Use Cloudability's business mapping to define rules.
- Indirect costs: Allocate platform and support costs based on a fair metric (e.g., number of customers per product, or support tickets).
Metrics for unit economics:
- Cost per customer: Total allocated cost / number of customers.
- Cost per transaction: For transaction-based products.
- Gross margin: (Revenue - allocated cloud cost) / Revenue.
- Infrastructure efficiency: Revenue per compute hour, or cost per GB stored.
Ensure the model is transparent and agreed upon by product owners. Use Cloudability to create custom reports and dashboards.
2. Based on the unit economics, what actions would you recommend for each product? Provide a framework for decision-making.
Read the worked answer
Framework:
- Product A (mature, profitable): Likely has good margins. Focus on maintaining efficiency and exploring further optimization (e.g., reserved instances).
- Product B (growing, high costs): Analyze cost drivers. If unit economics are improving with scale, invest in growth; if not, optimize infrastructure (rightsizing, spot instances) before scaling.
- Product C (experimental, low revenue, high consumption): Set a cost ceiling and evaluate whether to continue. If unit economics show potential (e.g., high customer value), invest in optimization; otherwise, consider sunsetting.
Decision criteria:
- Gross margin threshold: E.g., require >70% for mature products, >50% for growth.
- Payback period: For new products, ensure cloud costs are recouped within a certain period.
- Strategic value: Consider non-financial benefits (e.g., market entry).
Use Cloudability to model scenarios and track progress. Present findings with clear recommendations for each product.