Total Cost of Hosting Ownership (TCHO): What Goes Into It?

Guest author Andrew Sharpe is senior vice president, commercial, for Rails hosting company Ninefold.

It costs money to provide online servers to host any app, website, or other product. In most cases, though, analysis of these costs begins and ends with an online calculator, if the cost issue is even raised at all. And because cloud servers are relatively cheap and can easily be spun-up and spun-down on demand, most companies don’t look any farther than that.

Unfortunately, it’s usually not as simple as that. Thinking of hosting or cloud service costs as no more than a monthly line item on your credit card misses many of the true costs of hosting. For a realistic picture, you need to think about the Total Cost of Hosting Ownership, or TCHO.

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Your TCHO is made up of four factors:

  1. The actual cost of hosting. This is the easiest to identify and compare, but may be the smallest component of the total cost.
  2. The performance of the app, which can impact customer experience and ultimately revenue. This depends on how much revenue you generate through your app.
  3. The internal cost of deploying your code into production. This is the opportunity cost of the time it takes to actually get your code into production.
  4. The internal cost of monitoring and managing your production environment. This hidden cost covers making sure the networking is sound, the servers are working, and that customers can actually use your app. You know, ops.

To help explain the four components of TCHO, let’s look at the fictitious ABC Corp., an app-based, online-only, Software-as-a-Service provider earning $2 million yearly revenue. ABC Corp. has a CTO/CEO, five full-time developers, one testing/release manager, a support tech, a COO who looks after finance as well, a marketing manager, a community engagement manager, and a marketing systems admin. Let’s assume the 11 staffers earn an average of $150,000 for a wage bill of $1.65 million a year. The company also pays for a variety of systems (Jira, GitHub/BitBucket, BaseCamp, CRM, CMS, MarComms automation, billing, and more) that adds another $200,000 in costs, and ABC Corp. pays $50,000 in annual rent. That’s a total of $1.9 million in costs leaving $100,000 in profit … before we get to hosting.

1. Actual cost of hosting

The actual cost of hosting is the easiest to quantify, but relying solely on this figure leaves out many important expenses.

The choice of a hosting company is typically made by the developer team or the COO. Developers usually select a vendor they’ve used before, or perhaps a hot new vendor they’ve recently heard about. The COO looks at some calculators online, pretends to listen to the dev team, then chooses what he thinks is cheapest.

Lets visit our friends at ABC Corp., who currently leverage a basic Infrastructure-as-a-Service (IaaS) vendor for hosting–roll your own servers, no bells and whistles. Their hosting requirements run $2,000 a month ($24,000 a year) including testing and staging environments, and all the usage costs. ABC has also tested a Platform-as-a-Service (PaaS) offering that would cost $3,500 a month ($42,000 per year). They went with the IaaS vendor hoping that the $18,000 yearly price difference would drop right to the bottom line as profit.

Did ABC Corp. make the right decision?

2. App performance

The performance of an app can be measured in both page load time as well as the consistency of this performance. Both measurements matter in very different ways. Here’s some of the easiest ways to improve customer conversion and revenue with simple app performance improvements.

Faster page load speeds have long been linked to customer retention and sales. As quoted by CNET, Google’s data suggests a 500ms erosion in load time resulted in a 20 percent reduction in click through. Amazon reportedly provides an even easier metric: for every 100ms improvement in page load, revenue increased 1 percent.

Does 1 percent really matter? Well, for ABC Corp., every 1 percent represents $20,000 in additional annual revenue. If a different hosting provider could improve ABC’s average page load time by 300ms, that could mean $60,000 in additional revenue. If the PaaS offering delivered that improved performance out of the box, its additional cost of $18,000 would be more than offset by the additional revenue, resulting in an extra $42,000 in profit.

Consistency of app performance is even more important. Every interaction each user makes (typically a click) impacts their experience of your app or site. Their experience is not just the first page load, but their entire journey, which involves multiple clicks. This is something that we have tested extensively at Ninefold.

What does that mean for hosting and revenue? Let’s make some assumptions:

  1. 5 percent of clicks—1 in 20—are inconsistent
  2. 80 percent of the affected users will continue blithely along even after a slow page load—a very optimistic estimate
  3. The typical transaction path has 13 clicks.

Why is the number of clicks important? Because 1 in 20 clicks is not the same as 1 in 20 users. To calculate the number of users affected, remember Statistics 101 in college. The chance of each click not being affected is 95 percent. However, each click on the journey is subject to this same risk. Of course, not every click has the same impact, but to simplify the math, let’s assume they’re all equal.

The chart below shows the chance a user will face at least one “inconsistent click” based on the number of clicks in the process:

TCHO chart

With 13 clicks, one of every two visitors will experience the “inconsistent click” phenomenon.

What does this mean for ABC Corp.? If 50 percent of its users experience the inconsistent performance, and of those 20 percent leave and do not transact, the company is forfeiting 10 percent of its transaction funnel. On $2 million in revenue, that works out to $200,000 of potential revenue that could be lost due to inconsistent app performance.

3. Deployment costs

These are the costs for your team to get every release pushed and stable. How much can this cost? ABC Corp. has six people in its dev/release team, for a total of $900,000 in staff costs. The team runs on three-week sprints, with 17 releases a year.

If we assume that a PaaS deployment solution would save an average of half a day for the entire team for each release compared to staying with the IaaS provider. That’s a total of 8.5 workdays per team member, about half a sprint. Looked at another way, it 3.4 percent of the 250 available workdays for the entire year. At our assumed rate of $150,000, that comes out to $30,600 of wages.

4. Monitoring and managing your production environment

Given the importance of performance, it’s clear that you also have to devote resources to deployment, to keeping your app running and your systems flowing, and your networking operating smoothly. That typically means employing a SysAdmin or instituting a DevOps structure.

So how much would a DevOps approach cost? Let’s assume that each dev team member spends one week on rotation monitoring the environment. Further, let’s assume that each week a developer is on DevOps watch she loses 50 percent of her development time if ABC Corp. is using an IaaS solution vs. just 25 percent of her time with a PaaS solution. For ABC Corp., with a $150,000 developer cost, DevOps costs $75,000 in an IaaS world but just $37,500 in a PaaS world.

Adding up the Total Cost of Hosting Ownership

Let’s review the TCHO situation for ABC Corp. It currently spends $24,000 per year for basic Infrastructure-as-a-Service hosting. Going to a more comprehensive Platform-as-a-Service hosting offering would cost $42,000, an $18,000 a year difference.

But according to our calculations and assumptions, the PaaS solution would have the following effects:

  • Improving App Performance would bring in $60,000 in additional revenue
  • Making App Performance more consistent would bring in $200,000 in revenue now being lost
  • Improved deployments procedures frees up $30,600 of developer time
  • Reducing DevOps commitments for developers would release another $37,500 worth of developer time

That’s a total of $328,100 in annual revenue gains and productivity savings. Subtract the $18,000 price differential and you get $310,100 in net benefits for ABC Corp. That’s enough to hire two more developers!

Of course, these figures and assumptions may not directly match your company’s situation, but the principle is clear. Considering only the actual costs of hosting ignores important factors potentially worth far more than any out-of-pocket savings.

Spreadsheet image courtesy Shutterstock.com.

This post was written by a guest contributor. Please see their biographical details at the top of the post above. View posts by .

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