Business Model: How Snowflake Works And Makes Money

Snowflake is a cloud-based platform whose vision is to enable organizations to have seamless access to explore, share, and unlock data value. With the mission to break down data silos. The company runs through a consumption-based revenue model, enhanced by its professional services. Primarily an enterprise solution, Snowflake leverages on direct sales.

Table of Contents

Vision, Mission And Values

Snowflake’s vision is that of enabling organizations to have seamless access to explore, share, and unlock the value of data.

To realize this vision, Snowflake helps customers break down data silos. Why is this important in the first place? The core problem that Snowflake solves is the fruit of the massive amount of data generated in the digital era.

Where does the opportunity come from? Some of the key problems that Snowflake helps solve and that were the foundation of its core value propositions are:

Lack of formats that enable data to be used in other contexts: for many organizations, data is stored in formats that are not compatible to be used in several contexts, this is one of the reasons for data silos.
Inability to handle large volumes of data, especially in cases where organizations try to deal with big data, querying it becomes time-consuming and resource-intensive.
Inability to address and support as many use cases as possible within the organization.
High management costs of that data.
The difficulty of use.

All the aspects above, enabled Snowflake to get clear about the value customers get from its product:

snowflake-valueproposition — The claimed core value that Snowflake offers to customers are: data volume (the ability to handle massive amount of data across the organisation), performance, utility model (customers pay only for the resources they consume), Instant Elasticity (the ability of the cloud infrastructure to quickly adapt to the needed cloud resources automatically), and Ease of Use (Image Source: Snowflake S-1)

The above are some of the reasons that enabled companies like Snowflake to pursue their vision. In short, Snowflake helps its customers consolidate data within a single interface, platform, to generate use cases available across the company.

Snowflake also introduces a model that is more in line with cloud-based businesses. Rather than being subscription-driven, those are primarily based on consumption. Thus customers are charged based on the resources they are using at that moment.

The key value proposition of Snowflake stands in the fact that it offers a ready to use, a complete platform to its customers so that they don’t have to bear the maintenance costs and can integrate the data in the cloud provided by Snowflake across the company.

Snowflake claims positive network effects for its platform, as more customers join in, thus making the data on its cloud exchanged with other customers, thus enhancing the overall value of the platform.

With some core use cases:

Data engineering.
Data lake.
Data warehousing.
Data science.
Data applications.
And data sharing.

snowflake-data-layers — How Snowflake evolved over the years by adding new features and transition to become a single multi-cloud data platform enabling many use cases, beyond cloud data warehousing (Image Source: Snowflake S-1).

Below a quick demo of how the Snowflake platform looks like:

Customers

Below some key facts about how Snowflake’s customers look like:

representative-customers-snowflakes — Examples of clients across several industries, as reported by Snowflake in its S-1.

Technological model

As Snowflake’s platform evolved over the years, it added more and more use cases. As of now, customers can opt to use its platform for any of the main use cases available (data engineering, data lakes, data warehousing, data science, data applications, and data exchange), or use the platform as an end-to-end solution.

snowflakes-cloud-platform — Snowflake currently operates on public cloud infrastructure provided by Amazon Web Services (AWS), Microsoft Azure (Azure), and Google Cloud Platform (GCP). The more the platform scales up, the more it might be able to better negotiate pricing for its public cloud costs, thus, improve its margins. (Image Source: Snowflake S-1).

Snowflake’s Architecture

data-architecture-snowflakes — The three layers making up the Snowflake cloud platform (centralized storage, multi-cluster compute and cloud services).

The whole Snowflake architecture is broken down into three main parts: centralized storage, multi-cluster compute, and cloud services. The centralized storage is where all the data, be it structured or semi-structured is stored, and its kept consistent.

From there, instead, the other layer, the multi-cluster compute is the one that makes it possible to develop multiple use cases, accessing the single copy of the data (available on the centralized storage). And the cloud services layer makes it possible for the platform to keep a consistent and user-friendly customer experience.

Revenue Model

snowflake-revenue-breakdown — Snowflake generates most of its revenue from products/software. For instance, in 2023, almost 94% of its revenue came from product and 6% from professional services. Indeed in 2023, product generated $1.93 billion in revenue, compared to nearly $127 million from professional services.

Below some key facts about Snowflake’s revenue model:

As a cloud platform, it runs on the consumption-based of the product. Indeed as of July 2020, most of the revenues (over 93%) came from product usage.
Revenue growth from 2019 to 2020 was driven primarily by increased consumption of the platform, and sales prices increased 11% year over year (Snowflake instructed its sales force to apply fewer discounts for customer acquisition/retention).
As of July 2020, 56 customers with product revenue of greater than $1 million represented approximately 46% of Snowflake’s total product revenues.
Professional services made up the remaining chunk of revenues (less than 7%) as Snowflake ramped up its professional services to support its customers toward its usage.

Cost Structure

How does Snowflake spend money to generate its revenues?

Below the answer:

snowflake-cost-structure — The snowflake cost structure is skewed toward the product business, which not only generates most of the revenue for the company, but its gross margins. Indeed, in 2023, on $2 billion of revenue, the company reported $717 million in cost of sales, and $1.35 billion in gross profits, at a 62% gross margin, mostly coming from the product business, which generated a 71% gross margin in 2023, whereas the professional service business is run at 34% negative gross margin, in the same period. In short, Snowflake leverages the professional service business to boost its product business. And the former is run at negative margins, while the latter is run at widely positive margins.

It’s interesting to notice that Snowflake’s professional services cost of revenues equals its revenues (over $14 million of both costs of revenues and revenues from professional services). In short, Snowflake is using its professional services, not as an additional revenue stream, but as an enabler for its product revenues. It seems, the company is charging for professional services at cost, while its keeping higher gross margins on its product (as the professional services organization might be scaled, margins might improve).

Snowflake’s cost of product, instead, is comprised primarily of third-party cloud infrastructure expenses and headcount of support and engineering people that help deliver the platform in the first place.

How costs of revenues are managed is critical, as this will affect gross margins, which is one of the financial metrics that investors look the most.

For instance, from 2019 to 2020, gross margins increased from 49% to 62%. That happened primarily due to:

Better discipline over discounting (improved sales discipline).
Higher volume-based discounts for purchases of third-party cloud infrastructure (scale-based savings).
Increased scale across cloud infrastructure regions.

Sales And Marketing Model

Snowflake is an enterprise cloud solution, as such it primarily leverages on business development and direct sales to rump up its sales. The direct sales team is primarily comprised of:

Field sales.
Inside sales.
Sales executives.

Sales teams are organized across the regions served by Snowflake with the aim of acquiring new customers and drive existing customers to increase their platform usage.

The direct sales team is enhanced by the marketing side, where the platform is self-service at various levels within an organization (for instance, companies can activate a trial via Snowflake’s website), and from there, the direct sales team can engage with the C-suite level executives to secure larger contracts.

Another core marketing and distribution channel for Snowflake is its Partner Network, made of channel partners, system integrators, and technology partners, that help the company to source leads and increase the platform adoption.

Research And Development Model

The R&D part of the organization mainly comprises:

Software engineering.
User experience.
Product management.
Data science.
Technical program management and technical writing

As of July 2020, Snowflake’s R&D team counted 384 employees.

Key takeaways

Snowflake is a cloud-based platform that organizes data for companies across various industries to break data silos.
Snowflake’s vision is to enable organizations to have seamless access to explore, share, and unlock the value of data.
Its revenues primarily follow a consumption-based model, where customers pay based on the resources they use. Snowflake also built up the team offering professional services, which helps increase its platform’s adoption.
Snowflake’s solution is primarily an enterprise product; its adoption is increased via direct sales. At the same time, the company also uses a self-serving model for the activation of its platform.

Key Highlights

Vision and Mission: Snowflake’s vision is to provide organizations with seamless access to explore, share, and unlock the value of data while breaking down data silos. Its mission revolves around solving the challenges posed by massive data generation in the digital era.
Value Propositions: Snowflake addresses problems like incompatible data formats, handling large data volumes efficiently, supporting diverse use cases, managing data costs, and usability difficulties. Its core value propositions include data volume handling, performance, a utility-based payment model, instant elasticity, and ease of use.
Platform Evolution: Snowflake has evolved from a cloud data warehousing solution to a multi-cloud data platform offering various use cases such as data engineering, data lakes, data warehousing, data science, data applications, and data sharing.
Architecture: Snowflake’s architecture consists of three layers: centralized storage for consistent data storage, multi-cluster compute enabling multiple use cases, and cloud services providing a user-friendly experience.
Customers: Snowflake’s customer base has grown significantly over the years, with thousands of customers across various industries. It has a mix of customers generating different revenue levels.
Revenue Model: Snowflake’s revenue primarily comes from product/software usage, following a consumption-based model. It generates a significant portion of its revenue from customers paying based on the resources they consume.
Cost Structure: Snowflake’s cost structure is primarily skewed towards the product business, which generates higher revenue and gross margins. The company uses professional services to enhance its product business, even though professional services operate at negative gross margins.
Sales and Marketing: Snowflake leverages direct sales, business development, and a partner network to market and sell its enterprise cloud solution. It uses a combination of direct engagement and self-service activations to attract and retain customers.
Research and Development: Snowflake invests in research and development, comprising software engineering, user experience, product management, data science, and more. The R&D team focuses on enhancing the platform’s features and capabilities.

Business Model Recap

Element	Description
Value Proposition	Snowflake offers a range of value propositions for its customers: – Data Cloud Platform: Snowflake provides a cloud-based data platform that allows organizations to store, manage, and analyze data in a scalable and efficient manner. – Data Sharing: Snowflake enables secure and controlled data sharing across organizations, fostering collaboration and data-driven decision-making. – Data Integration: The platform supports easy data integration, allowing customers to consolidate and analyze data from multiple sources. – Scalability: Snowflake offers elasticity, allowing organizations to scale their data resources up or down as needed, reducing infrastructure costs. – Performance: Snowflake’s architecture is designed for high performance and speed, enabling real-time analytics and insights. – Security and Compliance: The platform emphasizes data security and compliance, making it suitable for sensitive and regulated industries.
Core Products/Services	Snowflake’s core products and services include: – Data Warehousing: Snowflake’s data warehousing service allows organizations to store and manage vast amounts of structured and semi-structured data in a cloud-based environment. – Data Sharing: Snowflake’s data sharing capabilities enable organizations to securely share data with external parties, such as business partners or customers. – Data Integration: The platform supports data integration from various sources, including databases, data lakes, and streaming data, providing a unified view of data. – Analytics and Insights: Snowflake provides tools and services for data analytics, including SQL-based queries and data visualization. – Data Lake Storage: Snowflake offers data lake storage capabilities, allowing organizations to leverage data lakes alongside structured data.
Customer Segments	Snowflake’s customer segments include: – Enterprise Businesses: Large and medium-sized enterprises across various industries use Snowflake to manage and analyze their data effectively. – Data-Intensive Industries: Industries with high data volumes, such as finance, healthcare, retail, and technology, benefit from Snowflake’s data management capabilities. – Data-Driven Organizations: Companies that rely on data-driven decision-making and analytics turn to Snowflake for its scalable data platform. – Cloud-Native Businesses: Organizations with a cloud-first or cloud-native strategy leverage Snowflake’s cloud-based data solutions. – Startups and Emerging Businesses: Even smaller organizations and startups can benefit from Snowflake’s scalable and pay-as-you-go model as they grow.
Revenue Streams	Snowflake generates revenue through several revenue streams: – Subscription Model: Snowflake primarily earns revenue through subscription-based pricing, where customers pay for the usage of the platform on a regular basis. – Data Storage: Revenue is generated from data storage fees, based on the amount of data stored on the platform. – Data Transfer: Snowflake charges fees for data transfer between the platform and external sources, including data ingestion and egress. – Data Sharing: Snowflake may charge fees for data sharing services, particularly for organizations that share data externally. – Premium Support: The company offers premium support services for customers, generating revenue through support contracts. – Professional Services: Snowflake provides professional services, such as training and consulting, contributing to revenue.
Distribution Strategy	Snowflake’s distribution strategy is designed to make its platform accessible and user-friendly: – Cloud Partnerships: Snowflake partners with major cloud providers, including AWS, Azure, and Google Cloud, making its platform available on these popular cloud platforms. – Self-Service: Snowflake emphasizes self-service, allowing customers to sign up and start using the platform quickly without extensive setup. – Online Marketplace: The platform is often available through online marketplaces, simplifying the procurement process for customers. – Developer Community: Snowflake has an active developer community and provides resources for developers to learn and implement the platform effectively. – Education and Training: Snowflake offers educational resources and training programs to help customers maximize the value of its platform. – Customer Support: The company provides customer support and professional services to assist organizations in implementing and using Snowflake effectively.