What You Are Paying For

When you go into your local burger shop and buy a burger, what are you paying for? One way to look at it is that you are paying for the food, for the convenience, for the experience - you are paying for what you get out of it.

You can also think about the things that are necessary to create the product you bought. There’s the beef and the buns. There’s also the labor that goes into making that burger. If you want to really pull apart the business you can list all sorts of things you are also paying for: the rent on the space the restaurant is in, their taxes, insurance, interest on loans, utilities, grease disposal, cleaning, advertising, repairs, accounting, shipping, spoilage, management, banking and payment services, toilet paper, and maybe a paper-thin slice of profit on top.

That mental model feels a lot more detailed. You could list out where every thousandth of a cent of that burger’s price ultimately goes. But that model misses a dimension: it misses why those elements cost what they do.

Take rent, for example. A big factor in rent costs is supply and demand. A big factor in the supply side is how much real estate the city will allow to be zoned commercially, and what restrictions they place on it. Laws intended to keep a city looking nice, like limiting the height of buildings, have a side effect of increasing rent. When you go to one of those hip locations to buy your burger, some of what you are paying for is the fact that the surrounding area is nice to be in. When you buy a burger you are buying the outcome of zoning decisions.

You are also paying for that location to continue to be a burger shop instead of turning into a Chase bank or Starbucks.

Let’s say that just down the street from the local burger shop is a franchise of the large national fast food chain of your choice. What are you paying for if you eat there, instead? Obviously you are paying for a slightly different mix of many of the same costs associated with the local place. The meat might be a bit cheaper but now there’s landscaping and power washing costs (this location has a drive-through). Since this location is a franchise of a chain, some slice of the pie also goes to that national chain. What does that buy?

It buys use of the brand name, it buys access to the logistics chain, and it buys advertising. It also buys whatever else that national chain decides to spend their remaining money on. In the corporate headquarters of every burger-selling chain out there, there will be someone whose job it is to handle expansion. Someone in some office building sits and makes decisions about whether a given site is good for a new location. When you buy a burger from your local instantiation of this burger empire, you are in effect buying more locations of that chain. Those new locations are likely somewhere hundreds or thousands of miles away and of little value to you.

When you pay for a SaaS service, part of what you are paying for is feature development. Whether you are paying for the feature development that already happened in the past, the feature development that is currently happening, or the feature development that will be done in the future… is left as an exercise for the reader. What it does not pay for is the development of features that are all aimed at you. Some of that development may go to make your life better: a thing runs a bit faster or has another bell and whistle. Some of that development is aimed more internally to the company: they make something cheaper for them to run, page them in the middle of the night less often, or have fewer security holes. But, like the national burger chain, some of it will be aimed at expansion. They will develop new features, spin up new teams, perhaps even create entire new product lines (or acquire other businesses) for the sake of expanding. They might start building the features that they need to have to win the big enterprise user, features that might be utterly useless to you. And yet part of what you are buying when you pay for that service is their ability to acquire those customers.

This entire line of thinking becomes practically useful when flipped on its head. Instead of thinking about the fact that buying a burger buys a nice neighborhood, one can follow the logic in the other direction and see that laws and policies that lead to nice neighborhoods will reduce the supply of commercial real estate, increasing the price of rent, and thus cause burgers to get more expensive. Expanding to enterprise users means giving your small users a bit less for their money. Every action has externalities, and every decision has costs. Things following the pattern of “you cannot have your cake and eat it too” (or “there’s no such thing as a free lunch”) are the rule not the exception.