3 ms·

yah, this is all econ 101 stuff. what you're talking about is a specific application of marginal analysis to a firm's pricing policy, namely, making sure margin

yah, this is all econ 101 stuff. what you're talking about is a specific application of marginal analysis to a firm's pricing policy, namely, making sure marginal revenue is greater than marginal cost (or, MC ≤ MR), ignoring sunk costs (like fixed costs). in software, fixed costs are high, but variable costs (e.g., COGS) are tiny, which is why software can be priced at just about any level (including "free") and still be profitable (in the absence of competition). the other economic concept at play here is arbitrage, which is being able to buy low and sell high risk free.

mr_toad 4y ago
> in software, fixed costs are high, but variable costs (e.g., COGS) are tiny In traditional software. SaaS has hosting costs, support costs etc.
- freediver 4y ago
  To add to this API and licensings costs too..
- clairity 4y ago
  in most cases, those (as well as licensing) aren't considered direct, variable costs, but rather sunk costs, as they exist regardless of the number of customers served, even if there's a rough correlation with size. this is akin to sales vs marketing costs. the former is usually a direct cost, while the latter is not, even though marketing costs often scale (roughly) with size too, but most of that cost isn't directly attributable to a specific revenue opportunity as in the sales case.
  - Dylan16807 4y ago
    Well, that's a dumb way of looking at things. If you have minimal customers, then your server costs don't need to go above the double digits. Servers will be almost 1:1, and licensing is usually 1:1. Considering them to be sunk costs is doing the math wrong. It's not like marketing at all.
    - clairity 4y ago
      perhaps consider chesterton's fence here. the topic at hand is pretty boring accounting 101, not some exotic double-dutch irish sandwich with a macau cherry on top. in most cases, you don't (and typically can't) attribute the costs of a given server to a single customer, and the licensing cost discussed here is not what you're charging, but what you're paying to provide the service (e.g., your database licensing costs are not 1:1 mappable to each customer).
      - Dylan16807 4y ago
        It's only chesterton's fence if I treat your method as a baseline. I thought you meant some kind of pass-through licensing, but otherwise the expensive stuff like database licenses generally charge per core, don't they? That's going to scale very directly with your number of customers. If you need 4 web server cores and 1 database core per ten customers, then you should not be treating servers as a fixed cost, you should consider each customer to cost half a core and 1/10th of a database core license fee. It's not perfect but it's much much closer to reality than thinking about servers as a fixed cost. Don't go buy 150 servers in anticipation of customers you don't have.
        clairity 4y ago
        it's the accounting/finance profession's fence you're quibbling with here, not something i just made up. those are indirect costs. in marginal analysis you only consider direct costs, not indirect ones (for background: https://www.investopedia.com/terms/d/directcost.asp https://www.investopedia.com/terms/d/directcost.asp).
        Dylan16807 4y ago
        "Wages of production staff" are more indirect than server costs if you're getting servers as-needed. Server use is easier to tie back to specific customers than employees, in part because you can add and remove them so easily. "A direct cost is a price that can be directly tied to the production of specific goods or services." yes that is the case here. And if I look at the first search results specifically talking about servers: https://www.ibm.com/downloads/cas/DG7NY5QW https://www.ibm.com/downloads/cas/DG7NY5QW says servers are a direct cost. https://blog.hubspot.com/marketing/direct-costs https://blog.hubspot.com/marketing/direct-costs says servers are a direct cost.

mr_toad 4y ago

> in software, fixed costs are high, but variable costs (e.g., COGS) are tiny In traditional software. SaaS has hosting costs, support costs etc.

freediver 4y ago
To add to this API and licensings costs too..
clairity 4y ago
in most cases, those (as well as licensing) aren't considered direct, variable costs, but rather sunk costs, as they exist regardless of the number of customers served, even if there's a rough correlation with size. this is akin to sales vs marketing costs. the former is usually a direct cost, while the latter is not, even though marketing costs often scale (roughly) with size too, but most of that cost isn't directly attributable to a specific revenue opportunity as in the sales case.
- Dylan16807 4y ago
  Well, that's a dumb way of looking at things. If you have minimal customers, then your server costs don't need to go above the double digits. Servers will be almost 1:1, and licensing is usually 1:1. Considering them to be sunk costs is doing the math wrong. It's not like marketing at all.
  - clairity 4y ago
    perhaps consider chesterton's fence here. the topic at hand is pretty boring accounting 101, not some exotic double-dutch irish sandwich with a macau cherry on top. in most cases, you don't (and typically can't) attribute the costs of a given server to a single customer, and the licensing cost discussed here is not what you're charging, but what you're paying to provide the service (e.g., your database licensing costs are not 1:1 mappable to each customer).
    - Dylan16807 4y ago
      It's only chesterton's fence if I treat your method as a baseline. I thought you meant some kind of pass-through licensing, but otherwise the expensive stuff like database licenses generally charge per core, don't they? That's going to scale very directly with your number of customers. If you need 4 web server cores and 1 database core per ten customers, then you should not be treating servers as a fixed cost, you should consider each customer to cost half a core and 1/10th of a database core license fee. It's not perfect but it's much much closer to reality than thinking about servers as a fixed cost. Don't go buy 150 servers in anticipation of customers you don't have.
      - clairity 4y ago
        it's the accounting/finance profession's fence you're quibbling with here, not something i just made up. those are indirect costs. in marginal analysis you only consider direct costs, not indirect ones (for background: https://www.investopedia.com/terms/d/directcost.asp https://www.investopedia.com/terms/d/directcost.asp).
        Dylan16807 4y ago
        "Wages of production staff" are more indirect than server costs if you're getting servers as-needed. Server use is easier to tie back to specific customers than employees, in part because you can add and remove them so easily. "A direct cost is a price that can be directly tied to the production of specific goods or services." yes that is the case here. And if I look at the first search results specifically talking about servers: https://www.ibm.com/downloads/cas/DG7NY5QW https://www.ibm.com/downloads/cas/DG7NY5QW says servers are a direct cost. https://blog.hubspot.com/marketing/direct-costs https://blog.hubspot.com/marketing/direct-costs says servers are a direct cost.