Profit margin

One of the factors that influence profit margin is the cost of goods sold (COGS). In a SaaS business model, COGS includes the costs of running and maintaining a SaaS application. Effective application architecture can positively contribute to profit margin by reducing operational costs. Below, we explore the architectural dimensions of a SaaS application that can influence COGS.

Tenancy model determines how resources are allocated across multiple tenants in SaaS application. Traditional software is typically single-tenant, whereas SaaS has to accommodate multiple tenants in the same application. When traditional software is converted into a SaaS offering without appropriate changes, it often leads to inefficiencies that can negatively affect profit margin.

Tenant resource management is another contributor to COGS. It includes salaries and benefits for engineers specifically maintaining deployments and updates of SaaS application. Manual resource management can lead to proportionally higher maintenance costs as your customer base grows.

Tenant decommissioning should be incorporated into the data retention strategy. SaaS is a subscription- and consumption-based business model, which means that, in most cases, customers can stop using service whenever they want. This can leave SaaS provider with a large amount of data and metadata generated by customers during their active period. Since this data is no longer covered by subscription fees, it effectively becomes a cost burden for the SaaS provider, which multiplies by the number of customers who have left.

Tenant cost allocation enables the mapping of infrastructure and operational costs to specific tenants. This helps to identify the most profitable customer segments, focusing sales and customer success efforts on high-margin segments. In addition, it can highlight unprofitable customers or features, which allows for appropriate adjustments to the pricing model and helps to prioritise development of the most profitable features.

The architectural dimensions above influence infrastructure efficiency and operational overhead, which in turn affect profit margins. To improve profitability, evaluate these dimensions to identify opportunities for optimisation that could reduce costs.