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Single-Tenant Vs Multi-Tenant SaaS Invoicing Models: How Can You Make Money With the Cloud – Part II.

This post is the second part after this one with an even longer title: A Cloud charging model, tailored to your clients … in other words, how can you make money with SaaS and make your users sign up with no hesitation?

In this run, we’ll look at how to set your invoicing strategy in a “single-tenant” (a.k.a. “dedicated”) environment or in a “multi-tenant” (a.k.a. “shared”) model. If you’re looking at a business read, keep reading – there’s very little technology in this post, but at this time, we can’t skip mentioning these. OK, no more introduction lines – let me jump into the ratatouille straight away …

Single-Tenant (dedicated) Architecture

In SaaS, the “Single-Tenant” could mean two things:

  • Either your Customer wants a dedicated environment because they don’t prefer sharing resources; or
  • Your SaaS service is not supporting multi-tenancy (sharing) – either because you’re just experimenting your current product in the cloud, or because there’s no point in sharing.

The single-tenant architecture is always more expensive than the multi-tenant one, because your Customers are not sharing resources, while your service’s infrastructure is possibly spinning the wheels most of the time and wasting your or (preferably) your Customer’s money.

In the diagram above, on the left-hand side, you can see a traditional monthly flat-rate invoicing model. Service Providers who offer this model either:

  1. Don’t bother understanding their Customers’ business and invoice a flat fee whether their Customers’ business is flying or busted already; or
  2. Their Customers prefer a fixed monthly fee, which they can budget for – this is typical in public sector or in large enterprises (banks/Telco).

Either way, the flat invoicing model is always set for the worst possible price, so it’s always the most expensive option and therefore, not very attractive to many Customers.

If you look at the right-hand side of the same diagram, that’s your SaaS service, based on a good understanding of your Customer’s Customers’ business. You understand when your Customer’s Customer’s business is going well and you charge your Customers in a way that reflects this. This is what makes your SaaS service a no-brainer decision for your Customers to sign up for. If this is a new concept to you, have a quick read through this article and learn about the concept of “happy units” in charging Customers.

What you might have noticed at the right-hand side of the picture is that below the variable monthly fee, there’s a fixed base price. Yes, this is the cost of a dedicated environment. If you set a base price for a dedicated environment, you can include in this base price your Azure (or other Cloud) bill for the dedicated resources, some contingency for peak usage and your other costs to run this dedicated environment – such as a portion of your support folks’ wages, etc. So, for a dedicated environment, there’s a fixed base price – but still a fraction of the traditional monthly flat fee. This fixed fee covers you to not make a loss on the service in case your Customer is making a loss – so you are not taking any risks at all. On top of the base fixed price, the monthly invoices vary, based on your Customers’ “happy units” and priced in a way that’s way more competitive than flat rates. This is what makes your invoicing model “business ready”.

Multi-Tenant (shared) Architecture

This is the real “Cloud Power” architecture, which helps your Customers leverage the best benefits that come with the Cloud.

As you can see at the blue columns, compared to the single-tenant architecture, your Azure (or other Cloud) costs go up slightly with the multi-tenant model. However, you are hosting many more Customers (and getting several times more revenue) in the same environment and resources are re-used and balanced very well. My experience is that in the case of business or simpler consumer applications, hosting 2 Customers in one environment requires either no or a maximum of10% increase in resources. By hosting several Customers in one Cloud environment, you boost your revenue while only slightly increase your costs. This is a situation when you can take more risks: the chances of all of them having a bad month is pretty low – or it could mean a market crash, which would affect you, anyway. So, you can develop a business-aligned invoicing model for them and offer a zero base cost model – this is what truly makes Customers sign up without thinking.

Conclusion

By offering a zero base cost model to your Customers and an invoicing model that is aligned with how their business goes, you can achieve the same effect that IKEA has achieved with their 90-day return policy: Customers will buy your service without thinking because they have nothing to lose. Know your Cloud Power and pass it over to your Customers.

How do you make it easy for your Customers? Please leave a comment or feedback and thanks for reading! Sign up for more articles or follow me on twitter: @SaaSinCloud.

 

David Szabo, Regional Cloud Strategy Advisor at Microsoft

Short URL: http://vertical-cloud.com/?p=3597

Posted by on Apr 2 2012. Filed under Featured, Finance, Governance, Information Technology, Manager, Mid-Sized, Public Clouds, SaaS / Software, Sales & Marketing, SMB, Start-Up, Strategy, VP / Director Level. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry
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