What is Cost to Serve? Analysing the profitability of your customers

Cost to Serve (CTS) analysis helps SaaS businesses understand the full cost of providing their software services to each customer. This approach reveals which customers are most profitable and which might be consuming more resources than their subscription justifies.

Understanding Cost to Serve in SaaS

Cost to Serve in SaaS looks at all the activities involved in delivering and supporting your software service for each customer. This includes costs related to hosting, customer support, account management, feature development, and more. By tracking these costs for each customer, SaaS businesses can see the full picture of customer profitability beyond just MRR.

Here's why Cost to Serve matters:

1. It shows growth problems. As SaaS companies expand, some customers or features may become too costly to manage. CTS analysis can spot these issues early, like a feature that works fine for small customers but uses too many resources as the company grows, hurting profits.

2. It helps with customer acquisition strategies. By knowing the long-term cost of serving different customers, you can focus on attracting the most profitable ones. This is more than just calculating customer lifetime value; it also looks at how much it costs to serve different customers over time.

3. It helps make infrastructure decisions. CTS data can guide you in choosing between cloud providers or services, balancing performance with cost. For example, a more expensive, high-performance service might save money overall by reducing the need for extra support or optimization.

4. It shows the real cost of customizations. For SaaS companies that offer custom features, CTS analysis can show if the extra fees charged for custom work truly cover the long-term costs, including maintenance, support, and how it affects future product updates.

5. It improves API usage. For SaaS products with APIs, CTS analysis can reveal which customers or integrations use them most efficiently. This helps in designing tiered API access that matches the true cost of different usage patterns.

6. It helps decide on self-service features. CTS analysis can show the return on investment (ROI) of self-service tools by highlighting how much they can save in customer support costs. It also helps prioritize which self-service features to build to reduce expensive support needs.

It's common to find that a small portion of customers generate most of the profits. Cost to Serve analysis helps identify these high-value customers and understand what makes them profitable.

How to Do a Cost to Serve Analysis for SaaS

Conducting a Cost to Serve analysis for a SaaS product involves several steps:

1. Identify All Your Costs

Start by listing all the activities involved in delivering your product. This might include:

• Cloud hosting and infrastructure costs

• Customer onboarding and training

• Ongoing customer support and success management

• Feature development and maintenance

• Sales and marketing efforts

• Account management and billing

2. Gather Cost Data

Once you know what activities to track, you need to quantify the costs. This often involves:

• Infrastructure costs per customer (e.g., storage, compute resources)

• Time spent by support and success teams per customer

• Development costs allocated to specific features or customizations

• Sales and marketing costs per acquired customer

3. Analyze Customer Behavior

Different SaaS customers use your product in different ways. Some might be power users who frequently contact support, while others might be low-touch customers who rarely need assistance. To get an accurate Cost to Serve, you need to understand these patterns for each customer.

Key things to look at include:

• Feature usage patterns

• API call volume

• Storage and compute resource consumption

• Frequency and duration of support interactions

• Use of customer success resources

unmess tracks all these customer actions, making it easier to see patterns and differences in how customers interact with your SaaS product.

4. Calculate the Cost to Serve

Now it's time to put it all together. For each customer, you'll add up all the costs associated with serving them. This includes both direct costs (like infrastructure usage) and indirect costs (like their share of development expenses).

P.S. unmess does this calculation automatically, creating a P&L statement for each customer. This shows exactly how much it costs to serve each customer and how much profit they generate.

5. Compare Costs to Revenue

The final step is to compare the Cost to Serve for each customer with the revenue they generate. For SaaS businesses, this typically means comparing costs against the customer's MRR or ACV.

6. Use unmess for End-to-End Cost to Serve Analysis

While the steps above outline the traditional process for Cost to Serve analysis, unmess offers a more streamlined approach tailored for SaaS businesses. With unmess, you can perform the entire Cost to Serve analysis in one place:

• Automatic cost identification: unmess integrates with your SaaS tech stack to identify all relevant cost drivers.

• Data aggregation: It pulls in data from various sources like your cloud provider, support system, and CRM.

• Customer behavior tracking: unmess monitors and analyzes customer actions and resource usage in real-time.

• Automated calculations: The platform performs all necessary calculations, providing up-to-date Cost to Serve figures for each customer.

• Instant comparisons: unmess automatically compares costs to MRR, giving you immediate insights into customer profitability.

• Continuous updates: The analysis is updated in real-time, ensuring you always have the most current information on your SaaS customers.

By using unmess, you can bypass many of the manual steps and potential pitfalls of traditional Cost-to-serve analysis, getting straight to the insights you need to optimize your SaaS business.

Using Cost to Serve Insights in SaaS

Once you have your Cost to Serve analysis, here's how you can use it in your SaaS business:

1. Segment Your Customers

Based on their profitability and cost to serve, you can group SaaS customers into categories. For example:

• High MRR, low cost to serve: These are your ideal customers. Look at what makes them efficient to serve and try to acquire more like them.

• High MRR, high cost to serve: These customers are valuable but there might be ways to serve them more efficiently, like improving self-service options.

• Low MRR, low cost to serve: These customers aren't costing you much, but there might be upsell opportunities.

• Low MRR, high cost to serve: These are the customers you need to look at closely. You might need to adjust their service level or encourage them to upgrade.

2. Optimize Your Pricing Tiers

For customer segments that cost a lot to serve, you might need to adjust your pricing or package features differently. This could mean creating new pricing tiers or adjusting usage limits.

3. Guide Product Development

Cost to Serve analysis can reveal which features are most expensive to maintain or support. This can help prioritize development efforts, either to make costly features more efficient or to focus on enhancing high-value, low-cost features.

4. Improve Customer Success Strategies

Not all customers need the same level of support. High-value customers might get dedicated account managers, while you might direct lower-tier customers to more scalable support options like knowledge bases or community forums.

5. Inform Sales and Marketing

Cost to Serve insights can help your sales and marketing teams focus on acquiring the right kinds of customers. They can target prospects similar to your most profitable customers and develop strategies to move customers to more profitable tiers.

6. Optimize Operations

Look for ways to reduce costs for high-cost customers. This might involve automating certain processes, improving documentation, or enhancing your product's user interface to reduce support needs.

Effective expansion revenue strategies rely heavily on integrating customer metrics into your financial reporting. This integration provides a more holistic view of your customer base and helps identify expansion opportunities. For more insights on this crucial practice, read our article on Integrating Customer Metrics in Financial Reporting.

Challenges in SaaS Cost to Serve Analysis

While Cost to Serve analysis is valuable for SaaS businesses, it can be challenging to implement:

1. Data Complexity: SaaS companies often have data spread across many systems (CRM, support ticketing, cloud infrastructure, etc.).

2. Dynamic Costs: Cloud infrastructure costs can vary based on usage, making it challenging to accurately attribute costs to specific customers.

3. Feature Cost Attribution: It's often difficult to accurately allocate development and maintenance costs of specific features to individual customers.

4. Frequent Changes: SaaS products and pricing models often evolve rapidly, requiring frequent updates to the Cost to Serve model.

This is where tools like unmess can really help. By automating data collection and analysis across your SaaS tech stack, unmess can overcome many of these challenges, providing up-to-date Cost to Serve insights without a lot of manual work.

Conclusion

Cost to Serve analysis gives SaaS businesses a clearer picture of customer profitability. It shows not just how much revenue each customer brings in, but how much it costs to deliver and support the service for them. This information helps with pricing, product development, customer success strategies, and overall business strategy.

While Cost to Serve analysis can be complex for SaaS businesses, tools like unmess make it more accessible. unmess automates much of the process, tracking costs for each customer action and providing real-time insights.

With unmess, SaaS businesses can:

• See costs and profits for each customer in real time

• Identify which activities or features are driving up costs

• Model different pricing scenarios to see how changes would affect profitability

• Provide actionable insights to teams across the business

By using Cost to Serve analysis, SaaS businesses can make more informed decisions about how to serve their customers profitably. It's not about cutting costs across the board or dropping less profitable customers. Instead, it's about understanding the true cost of serving each customer and finding ways to do it more efficiently.

Cost to Serve analysis, especially when powered by tools like unmess, helps SaaS businesses serve their customers better while also improving their own profitability and sustainability.