5 ms·

Even without the free trial, how on earth can you burn $100 in cloud resources in a month if you plan to resell it for $10?

by LeonM 7y ago

ignoramous 7y ago
That's the lesson: The most obvious advice isn't obvious. If one goes through https://startupschool.org/library https://startupschool.org/library one realises how much of the advise ought to be common knowledge and common sense, but that's the thing, folks ignore it all the time. Another mistake, it was pointed out by Kevin Hale, iirc, this year at startupschool, that founders make is they think their pricing model (or their UX) is a key differentiator, when in most cases it isn't.
- LeonM 7y ago
  > Another mistake, it was pointed out by Kevin Hale, iirc, this year at startupschool, that founders make is they think their pricing model (or their UX) is a key differentiator, when in most cases it isn't. Yes, I have seen that happen a few times in SuS (I'm a 2018 and 2019 batch alumni). Founders are obsessive about their pricing and as a result they usually undercharge. My usual advice to pre-market-fit stage founders is that you don't know yet what the right price is, so choose $random_price and move on, you can always adjust later. And for post-market-fit stage: raise your prices. Of course, there is no single 'right' answer on pricing. It depends on many factors, but for B2B it usually holds true that pricing isn't that much of a differentiator.
- staticautomatic 7y ago
  What part of spending $100 to get $10 being a bad idea is not obvious?
  - tapatio 7y ago
    Amazon was built doing just that.
    - staticautomatic 7y ago
      Apples and oranges.
  - mooreds 7y ago
    The part where it: * Lets you easily explore a new business offering * Without investing a large amount of engineering time As soon as they realized they had significant demand and horrible unit economics, they should have revised their cost structure/app architecture. Which is exactly what this post is about.
    - listenallyall 7y ago
      If I start renting Porsches for $10/day I'm going to have massive demand. When I finally build out the rest of my infrastructure, get tired of burning cash, and decide to start charging a price that reflects the true costs, the initial measure of demand is totally irrelevant.
matthewaveryusa 7y ago
I think the basic idea is 'you need money to make money.' The hope is that with scale and engineering they can burn less. It is dubious that anyone can reduce from 100 to 10 -- 90% reduction would be an incredible feat, and this is why: AWS has something like profit 25% margin. Therefore assuming that AWS is within 15% of doing a half-decent job at controlling costs, that's still max 40% profit margin if you were running bare-metal and beating AWS at their own game to the tune of 15%. So if you're selling stuff for 10/month, your AWS bill should be 17/month just to break even after all the awesome engineering you've done with the VC money -- at least that's how I see it. Now, if they are doing incredibly stupid stuff, to the tune of 90% wasted ec2 cpu cycles/db requests, then maybe they've priced it right -- who knows. Would love to hear some insights on where I might be wrong/misjudging here.
- paulstovell 7y ago
  We’re confident our v2 architecture can. Current costs are between $10-15 per trial. Future posts will go into detail around how it works.
- jiveturkey 7y ago
  You're not including the scale factor in your reasoning. AWS has (taking your number as correct) 25% margin at immense scale. Hardware is cheap at this scale. unit pricing for power and space is cheap at this scale. But labor cost is enormous at this scale. Even factoring in leverage of automation, at this scale there is just enormous bureaucracy. One guy or just one team just can't "do something". Anything worth doing will have enormous repercussions across many areas and needs to go up and down the chain. Stuff still gets done, because impact is large at this scale. > 90% wasted ec2 cpu cycles/db requests, So then, my point is, if you are just using EC2 and egress, AWS is very expensive. You don't need all the big scale engineering they have, to launch an MVP. Of course, you need to be able to hire the type of people that can manage in-house compute, and that may be hard to find these days, at any price. But taking labor shortage out of the calculation, it's vastly better to DIY. If you are using PaaS features, that's the sweet spot where you get tremendous value out of AWS. > profit 25% margin. Therefore assuming that AWS is within 15% of doing a half-decent job at controlling costs, that's still max 40% profit margin. Getting back to this, even if you dispute all of what I've said, your basic math is wrong. 15% short on 25% is 29.4%. (25/.85, not 25+15).
paulstovell 7y ago
The $10 was the starting price. It’s not uncommon for companies to have a cheaper “loss leader” tier.
- cbm-vic-20 7y ago
  A company should figure out what the "real" price should be, and account for the difference in the marketing budget. ie, if the service costs $100/mo to deliver, and if you would otherwise charge $120/mo for the service, but you're only charging $10/mo, you should consider that $110/mo a marketing expense if it needs to be a "loss leader". It's got to show up in the books somewhere.
RantyDave 7y ago
The theory is that if you burn through a few (many) kilodollars doing it the inefficient way then you can at least prove the existence of a market for doing it properly ... and have a head start in actually having subscribers. I see the theory but $100k/mo in AWS fees is madness. They could probably knock a zero off just by deploying in containers.
- syspec 7y ago
  Why is that? (Sincere question)

Even without the free trial, how on earth can you burn $100 in cloud resources in a month if you plan to resell it for $10?

by LeonM 7y ago

Even without the free trial, how on earth can you burn $100 in cloud resources in a month if you plan to resell it for $10?

ignoramous 7y ago

That's the lesson: The most obvious advice isn't obvious. If one goes through https://startupschool.org/library https://startupschool.org/library one realises how much of the advise ought to be common knowledge and common sense, but that's the thing, folks ignore it all the time. Another mistake, it was pointed out by Kevin Hale, iirc, this year at startupschool, that founders make is they think their pricing model (or their UX) is a key differentiator, when in most cases it isn't.

LeonM 7y ago
> Another mistake, it was pointed out by Kevin Hale, iirc, this year at startupschool, that founders make is they think their pricing model (or their UX) is a key differentiator, when in most cases it isn't. Yes, I have seen that happen a few times in SuS (I'm a 2018 and 2019 batch alumni). Founders are obsessive about their pricing and as a result they usually undercharge. My usual advice to pre-market-fit stage founders is that you don't know yet what the right price is, so choose $random_price and move on, you can always adjust later. And for post-market-fit stage: raise your prices. Of course, there is no single 'right' answer on pricing. It depends on many factors, but for B2B it usually holds true that pricing isn't that much of a differentiator.
staticautomatic 7y ago
What part of spending $100 to get $10 being a bad idea is not obvious?
- tapatio 7y ago
  Amazon was built doing just that.
  - staticautomatic 7y ago
    Apples and oranges.
- mooreds 7y ago
  The part where it: * Lets you easily explore a new business offering * Without investing a large amount of engineering time As soon as they realized they had significant demand and horrible unit economics, they should have revised their cost structure/app architecture. Which is exactly what this post is about.
  - listenallyall 7y ago
    If I start renting Porsches for $10/day I'm going to have massive demand. When I finally build out the rest of my infrastructure, get tired of burning cash, and decide to start charging a price that reflects the true costs, the initial measure of demand is totally irrelevant.

matthewaveryusa 7y ago

I think the basic idea is 'you need money to make money.' The hope is that with scale and engineering they can burn less. It is dubious that anyone can reduce from 100 to 10 -- 90% reduction would be an incredible feat, and this is why: AWS has something like profit 25% margin. Therefore assuming that AWS is within 15% of doing a half-decent job at controlling costs, that's still max 40% profit margin if you were running bare-metal and beating AWS at their own game to the tune of 15%. So if you're selling stuff for 10/month, your AWS bill should be 17/month just to break even after all the awesome engineering you've done with the VC money -- at least that's how I see it. Now, if they are doing incredibly stupid stuff, to the tune of 90% wasted ec2 cpu cycles/db requests, then maybe they've priced it right -- who knows. Would love to hear some insights on where I might be wrong/misjudging here.

paulstovell 7y ago
We’re confident our v2 architecture can. Current costs are between $10-15 per trial. Future posts will go into detail around how it works.
jiveturkey 7y ago
You're not including the scale factor in your reasoning. AWS has (taking your number as correct) 25% margin at immense scale. Hardware is cheap at this scale. unit pricing for power and space is cheap at this scale. But labor cost is enormous at this scale. Even factoring in leverage of automation, at this scale there is just enormous bureaucracy. One guy or just one team just can't "do something". Anything worth doing will have enormous repercussions across many areas and needs to go up and down the chain. Stuff still gets done, because impact is large at this scale. > 90% wasted ec2 cpu cycles/db requests, So then, my point is, if you are just using EC2 and egress, AWS is very expensive. You don't need all the big scale engineering they have, to launch an MVP. Of course, you need to be able to hire the type of people that can manage in-house compute, and that may be hard to find these days, at any price. But taking labor shortage out of the calculation, it's vastly better to DIY. If you are using PaaS features, that's the sweet spot where you get tremendous value out of AWS. > profit 25% margin. Therefore assuming that AWS is within 15% of doing a half-decent job at controlling costs, that's still max 40% profit margin. Getting back to this, even if you dispute all of what I've said, your basic math is wrong. 15% short on 25% is 29.4%. (25/.85, not 25+15).

paulstovell 7y ago

The $10 was the starting price. It’s not uncommon for companies to have a cheaper “loss leader” tier.

cbm-vic-20 7y ago
A company should figure out what the "real" price should be, and account for the difference in the marketing budget. ie, if the service costs $100/mo to deliver, and if you would otherwise charge $120/mo for the service, but you're only charging $10/mo, you should consider that $110/mo a marketing expense if it needs to be a "loss leader". It's got to show up in the books somewhere.

RantyDave 7y ago

The theory is that if you burn through a few (many) kilodollars doing it the inefficient way then you can at least prove the existence of a market for doing it properly ... and have a head start in actually having subscribers. I see the theory but $100k/mo in AWS fees is madness. They could probably knock a zero off just by deploying in containers.

syspec 7y ago
Why is that? (Sincere question)