Non fungible money in cloud accounting

Fungible is a funny word, mostly because you are most likely familiar with the term from NFT (non-fungible tokens) and other similar scams. At its core, it is the idea that for certain things, the instance doesn’t matter, just the amount.

The classic example is that if I lend you a 50$ bill, and you give me back two 20$ bills and a 10$ bill, you’ve still given me back my money. That is even though you very clearly didn’t. I didn’t get the same physical 50$ paper bill back, I got bills for that same amount. On the other hand, if I give you my dog for the weekend, I would be quite upset if I got back three different dogs, even if the total weight is the same.

This is actually a lot more than I want to know about fungibility, to be honest. But it turns out that if you are running a cloud business or just use the cloud in general, you have to be well-versed in the matter. Because in the cloud, money isn’t fungible. In fact, it doesn’t behave a lot like money at all.

Let’s assume that we are a cloud company called cloud.example.com, offering VPS for ourr users. You are in charge of writing the billing code, and it is pretty simple, right? Here is some code that can compute the charges:

function compute_charges(custId, start, end) { let total = 0; let predicate = instance => (instance.custId === custId && instance.started < end) && (instance.ended > start || instance.ended == null); for (let instance of query_instances(predicate)) { total += instance.hours_running(start, end) * instance.price_per_hour; } return total; }

As you can see, there isn’t much there. We find all the instances that were running in the billing period and then calculate the total hours they ran during that period. Please note, this is a simplified model as we aren’t dealing with stopping & starting instances, etc.

The output of the compute_charges() function is a number, which will presumably be handed over to be charged over a credit card. There are other things that we need to do as well (generate an invoice, have a usage report, etc), but I want to focus on the money issue here.

The simplest model is that at the end of the billing period, we charge the customer (using a credit card, for example) and receive our payment. Everyone is happy and we can go home, hopefully richer.

The challenge arises when we want to offer additional options to the customer. For example, we may be willing to give the customer a discount if they are going to commit to a minimum amount of money they’ll spend each month. We may want to offer them upfront payment options or give monetary incentives to a particular aspect of the business (run on ARM instances instead of X64, for example).

Each time that we make such an offer, we are going to be turning around and (significantly) complicating the way we bill the customer. Let’s talk about something as simple as committing to run an instance for a whole year. No upfront payment, just a commitment to pay for a particular server for a year. In AWS or Azure, that would be Reserved Instances, so you are likely very familiar with the idea.

How is that going to be expressed in code? Probably something like this:

function compute_charges(custId, start, end) { let total = 0; let predicate = instance => /*..redacted.*/; var hrsPerIns = {}; for (let i of this.instances(predicate)) { let hours = i.hours_running(start, end); hrsPerIns[i.type] = hours + (hrsPerIns[i.type] || 0); total += hours * i.price_per_hour; } for (let c of this.commitmentsFor(custId, start, end)) { let hours = c.committed_time(start, end); let hoursUsed = hrsPerIns[c.type] || 0; let unusedCommittedHours = Math.max(0, hours - hoursUsed); total += unusedCommittedHours * this.instance(c.type).price_per_hour; } return total; }

To be clear, the code above is not a good way to handle such a task, but it does show in a pretty succinct way the hidden complexities. In this case, if you didn’t meet your commitment, we’ll charge you for the unused commitment as well.

A more complex system would have to account for discounted rates while using the committed values, for example. And in that case, the priority of applying such rates between different matching commitments.

Other aspects may be giving the user a discount for a particular level of usage. So the first 100GB are priced differently from the rest, applying a free tier and… you get the point, I think. It gets complex.

Note that at this point, we aren’t even talking about money yet, we are discussing computing the charges. The situation is more interesting when we move to the next stage. On the face of it, this seems pretty simple, all you need to do is charge the credit card, no?

Okay, maybe you need to send an invoice, but that is about it, right?

Well… what happens if the customer made an upfront payment for one of those commitments? Or just accidentally paid twice last month and now has credit on your system.

I’m going to leave aside the whole complexity around payments bouncing (which is a whole other interesting topic) and how to deal with the actual charging. Right now I want to focus on the nature of money itself.

Imagine you have a commitment with a customer for an 8-core / 64 GB VPS server for a whole year. And they paid upfront, getting a nice discount along the way. How would you record that in your system?

The easiest is to create the notion of credit for the user, which you deduct whenever you need to charge them. So we’ll first compute the charges, then deduct the existing credits, and debit the customer if anything remains. This is simple, easy to work with, and wrong.

Remember that discount the user received? They paid for that particular VPS type, and if you now need to charge them for anything else (such as storage charges), that money cannot come from the funds paid for the VPS.

In other words, the money the customer paid is not fungible. It isn’t applicable for any charge, it is colored. It is dedicated to a particular purpose. And managing that turns out to be pretty complex. Mostly because we are trying to fit everything into the debits and credits on the account.

A better model is to avoid using money, in the same way that if you mix inches and centimeters you’ll eventually end up in a bad place on Mars. The solution is to treat each individual charge as its own “currency”.

In other words, when computing the charges, we aren’t trying to find the cost of running a particular instance for the billing period. We are trying to find how many “cost units” we have for that time period.

Instead of getting a single number that we’ll charge the customer, we’ll obtain a detailed set of the changes in question. Not as money, but as cost units. Think about those in a similar way to currency.  Note that all the units are multiples of 730 hours (number of hours per month, on average).

compute_charges(custId, start, end) => { custId: 'customers/3291-B', start: '2024-01-01', end: '2024-01-31', costs: [ {type: '8Cores-64GB-hours', qty: 2190}, {type: '4Cores-32GB-hours', qty: 730}, {type: 'disk-5000-iops', qty: 2920}, ], }

The next step after that is to get your allocated budget for the same billing period, which will look something like this:

compute_budget(custId, start, end) => { custId: 'customers/3291-B', start: '2024-01-01', end: '2024-01-31', commitments: [ {type: '8Cores-64GB-hours', qty: 2190}, {type: '4Cores-32GB-hours', qty: 1460}, {type: 'disk-5000-iops', qty: 730}, ], }

In other words, just as we compute the charges based on the actual usage for that billing period, we apply the same approach on the commitments we have. The next stage is to just add all of those together. In this case, we’ll end up with the following:

• 8Cores-64GB-hours ⇒ 0 (we used as much as we committed to)
• 4Cores-32GB-hours ⇒ -730 (we committed to more than we used)
• Disk-5000-iops ⇒ 2190 (remaining use after applying commitment, priced as you go)

We aren’t done yet, after commitments, there are other plans that we may need to run. For example, we’ll provide you with some global discounts for VM rental (which doesn’t apply to disks, however). Working at the level of cost units (or colors, or currency, whatever term you like) allows us to apply those things in a very fine-grained manner. More importantly, the end result and all its intermediate steps are very clear. That is quite important when you look at a six-figure bill with hundreds of line items and you want to see whether the billing matches your contract or not.

As you can imagine, given the inherent complexity of the system, being able to clearly “show your work” is quite important. Especially when there is a misunderstanding or questions are being raised (and there will be).

What we have done now is compute the actual charges based on their type, but we need to convert that to real money. There are several steps along this process:

1. We need to charge all the active commitments. Those may have been pre-paid (in which case there is no current charge), but they may have a (fixed) monthly cost that we need to add to the current invoice.
2. We need to perform a “currency conversion” between the units we have and actual money. In the example above, we have a negative number of units (for 4Cores-32GB-hours), as we committed to more hours than we actually used. We are still being charged for this by applying the rate from the commitment.
3. On the other hand, when we examine the disk costs, we used more than we committed to. Here we need to make a decision about what price we’ll charge the user. It can be the commitment price or the pay-as-you-go price. So even for the same currency we may have different rules.

After all of this is done, we are now left with a final number. The actual amount of money that we need to charge the customer. This is the point at which we check if the customer has any credit already paid in the system or if we need to make an actual charge. That aspect is complicated by whether you are charging a credit card (same for any other automatic billing option) or issuing an invoice to be paid manually.

For a manual invoice, you now have a whole other process. For example, you may offer discounts for the customer if they pay within 14 days versus the usual 30, or charge a fee for paying within 60 days, etc.

I’m not touching on collections or what to do when you fail to charge the customer. It is shockingly common to encounter payment failures. To the point where we never had a single payment run that didn’t include at least several such cases. The reasons range from deal size too big to (temporary) lack of funds to suspicious-seeming activity. You need to be able to handle that as well. But those are topics for another post.

In this post, my aim was to discuss just the issue of the complexity of money in the cloud business. I find the model of treating the charges as separate “currencies” to be a nice one overall, but I would love to hear about other people’s experiences in this matter.