Modeling Hosting Charges for a SaaS or App Business
Q: I'm creating a financial model for a SaaS business and I’m trying to figure out how to enter my hosting assumptions as subscribers increase since I need to add servers and computer costs as subscriber count grows.
A: The three typical ways of handling hosting expenses are: 1) a Revenue Share (for app stores), 2) a variable cost/subscriber (Cost of Sales), or 3) a Direct Expense monthly hosting fee that is chunky cost for each dedicated hosting server and increases periodically as you need to bring another dedicated server online.
Details are as follows:
Revenue Share - Enter a Revenue Share assumption if your SaaS/App host charges a revenue share like many SaaS and App Stores do (25% Revenue Share in the example below):
Cost of Sales - Enter your variable hosting/subscriber cost as a Cost of Goods Sold/Cost of Sales assumption if you are hosting with a data center that has a fixed hosting fee for each customer that scales with your business ($5/customer/month in the example below):
Other Direct Expense - Enter a monthly direct expense cost assumption if you are hosting with a data center that charges you a monthly cost per server and you have multiple offerings on that server or in that hosting agreement, but you still want all of your hosting expense modeled as a Direct Expense. For example, let’s say you ink a hosting deal with someone like Rackspace or AWS with a dedicated server that will have a capacity of approximately 1,000 hosted customers and costs 750/month, your Revenue Share would be blank, your COGS per Offering would be blank, and you would input $50/month starting the month prior to signing your first customer as in the example below. In this case, you would eventually bump that up periodically as your subscriber count requires a second server, a third server, etc. based upon server capacity.
