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In the world of cloud computing and financial operations (FinOps), understanding and optimising unit economics is crucial for the long-term success of any cloud-based business, or more to the point any business’s cloud use-case. Unit economics refers to the financial analysis of individual units of a business, such as customers, products, or services, to determine their profitability and sustainability. In the cloud context, it looks specifically at cloud costs vs any given unit. In this blog, we will delve into the concept of unit economics, explore its significance in cloud FinOps, understand the challenges people face in getting started, and provide some simple steps to initiate unit economics in cloud FinOps.

As one of the big buzzwords around FinOps in the past 2 years Unit Economics has been on a lot of peoples lips, but not something well understood - it’s been seen as somewhat of a nirvana. Anyone who has read the version 1 (or 2) O’Reilly book ‘Cloud FinOps’ by J.R. and Mike (Storment and Fuller) will have gotten excited by the possibilities it brings to the table, and quite rightly too. But for those of you who haven’t read the book and haven’t yet found the time to really look into the subject, what is Unit Economics?

What is Unit Economics?

Unit economics involves analysing the costs and revenues associated with individual units or components of a business. It aims to assess the financial viability of these units and understand their contribution to overall profitability. By examining the cost per unit and the revenue generated per unit, businesses can evaluate the sustainability and scalability of their operations.

What is Cloud Unit Economics?

Cloud unit economics specifically focuses on the financial analysis of cloud-based services, products, or customers. It involves assessing the costs and revenues associated with cloud infrastructure, services, and applications. Cloud unit economics helps organisations understand the profitability of their cloud investments, optimise resource utilisation, and make informed decisions regarding capacity planning, pricing models, and service offerings.

Why is Unit Economics Important in Cloud FinOps?

Cost Optimisation: Understanding unit economics enables businesses to identify cost drivers and optimise cloud resource consumption. By analysing the profitability of different cloud services, organisations can prioritise investments, adjust usage patterns, and eliminate unnecessary expenses.

Pricing Strategy: Unit economics helps in determining appropriate pricing models for cloud services. By considering the costs incurred per unit and the value delivered, organisations can set competitive pricing structures that align with customer expectations and business goals.

Business Growth: Unit economics provides valuable insights into the scalability and profitability of cloud services. By analysing the revenue generated per unit, businesses can identify opportunities for growth, expansion, and the acquisition of new customers.

Why Do People Find It Hard to Start Unit Economics?

While unit economics is essential for business success, many people find it challenging to get started. Here are a few reasons why:

Lack of Data Visibility: Accurate data is crucial for unit economics analysis. However, obtaining and consolidating data from various sources can be a complex task, especially in cloud environments with multiple service providers and disparate data streams.

Complexity of Cloud Billing: Cloud billing structures can be intricate, making it difficult to attribute costs accurately to specific units or customers. Understanding the various pricing models, discounts, and usage patterns requires expertise and careful analysis.

Limited Financial Expertise: Unit economics requires financial acumen and an understanding of key financial metrics. Individuals without a finance background may find it challenging to interpret and analyse financial data effectively.

Simple Steps to Start Unit Economics in Cloud FinOps:

Define Units: Identify the key units or components of your cloud business that you want to analyse. This could be customers, services, applications, or any other relevant entity.

Gather Data: Collect relevant data pertaining to costs and revenues associated with the identified units. Ensure you have access to accurate and granular information, including cloud usage, billing details, and financial metrics.

Calculate Unit Metrics: Determine the unit-specific metrics that are important for your business, such as cost per unit, revenue per unit, profitability, and growth potential. Use these metrics to gain insights into the financial performance of individual units.

Analyse and Optimise: Analyse the unit economics data to identify areas of improvement and cost optimisation. Look for patterns, trends, and anomalies that can guide decision-making and resource allocation. Optimise costs, adjust pricing models, and reallocate resources based on the findings.

Iterate and Refine: Unit economics is an ongoing process. Continuously monitor and refine your unit metrics based on changing business dynamics, market conditions, and customer demands. Regularly review and update your analysis to ensure its relevance and accuracy.

Conclusion

Unit economics plays a vital role in cloud FinOps by providing valuable insights into the financial performance of individual units in a cloud-based business. It enables organisations to optimise costs, devise appropriate pricing strategies, and identify growth opportunities. Although starting unit economics can be challenging, following simple steps can help businesses initiate the process and gain a deeper understanding of their cloud-based operations. By leveraging unit economics, businesses can make data-driven decisions that drive profitability and sustainable growth in the ever-evolving cloud ecosystem.