Cost To Serve is a critical metric for Staff+ SaaS Developers to understand because it shapes your understanding of the business.  Extremely oversimplified, Cost To Serve is the cost of  everything that goes into producing, running, and supporting software, divided by the number of customers.

Cost To Serve = [The cost of everything] / [Number of Customers]

This is extremely inaccurate, but it helps to point out two major concepts.  First, a large part of Cost To Serve is fixed.  Developer salaries, aka producing software, do not change based on the number of customers.  This leads to the second concept, SaaS pricing models work on leverage.  As the number of customers goes up, the fixed costs to serve each one goes down.

So, the path to success is to get as many customers as possible right?  No, because not all costs are fixed, and not all customers are profitable.

Not All Customers Are Profitable

The first problem with the oversimplified view is that not all customers cost the SaaS the same amount of money.  This is why SaaS pricing includes feature and usage tiers.  The problem is that the features and tiers don’t exactly align with usage and cost.

Pricing based on Contacts is standard for CRMs, charging for imports is rare.  A customer who imports 1 million contacts once has a lower cost than one who reimports a million contact list every week.

Webhooks never make it into pricing models, but their costs add up.

There are dozens of legitimate usage patterns that can make the difference between profitable and unprofitable customers.  You won’t find them on the pricing page, but chances are your finance department has at least a vague model.  It is expected that some customers will be more profitable than others; and that some will even be unprofitable.

You Need A Model For Cost To Serve

It doesn’t matter what your company’s Cost To Serve is and you don’t need to know the fixed costs.  What you need is a model to evaluate customer usage.  You need to be able to explain which usage patterns are expensive and estimate the potential costs of new features.

If your SaaS is complex, try breaking it down like Big-O notation.  What costs scale linearly, which ones are exponential?

Your model can improve over time, the important thing is to start today.  Cost To Serve is a critical metric for SaaS companies; as a Staff+ Developer you need to understand it, and how it differs from your company’s pricing model.