The cost of goods sold (COGS) for a company varies depending on its industry or market. We’ll outline how to track and calculate COGS for a SaaS company below, as well as how it differs from other important SaaS metrics and factors into your customer success team goals.
What is the cost of goods sold (COGS) for a SaaS company?
The cost of goods sold (COGS) is the cost a company incurs to deliver a product (or service) to its customers. It’s simply a total of all expenses associated with creating that product or service and is variable as the company grows and increases sales. It’s sometimes referred to as cost of sales or COGS report.
What is included in COGS?
COGS includes all direct costs associated with producing or delivering a product or service. This typically covers expenses like raw materials, labor directly involved in production or delivery, software hosting fees, support staff salaries (if they provide customer service for a product), and any third-party services required to fulfill the offering. It does not include indirect costs like marketing, office rent, or general administrative expenses.
For SaaS companies, the “goods sold” are items a single customer needs once they purchase software, and tend to fall under the category of infrastructure and customer support. Your own itemized COGS list might include:
- Subscription costs
- Site operations costs (hosting, fees, personnel)
- Support personnel and account management costs
- Software implementation costs
- Training, onboarding and professional services costs
COGS also differs from operating expenses (OPEX) since those are not tied to the production of goods, services, or software. Items like customer acquisition, software development, and G&A are not included in COGS since they don’t change with the addition of a new customer (and generally, a software company does not have to produce something new when it sells a new subscription).
How is cost of goods sold (COGS) calculated?
To calculate COGS for a SaaS company, you first add up all of your costs referenced above (infrastructure, support and any purchases associated with your product). Then you deduct from your revenue to calculate gross profit and gross margin.
The example below calculates a company’s monthly COGS percentage and gross margin:
Monthly COGS total: $60,650
- Hosting expenses: $8,750
- Internal engineering support: $4,100
- Customer support: $12,300
- Third-party and/or transaction fees: $3,500
- Professional services: $32,000
Total monthly revenue: $200,000
Percentage of COGS to revenue: 30% [$60,650 / $200,00]
Gross margin: 70%
SaaS companies see an average COGS in the range of 5% to 40%. Higher COGS are generally influenced by more complex software implementation or service costs (and therefore result in lower gross margins). A thriving SaaS business model would have a gross margin between 80-90%, with a COGS around 10-20% of total revenue.
What is the difference between COGS and CAC?
It’s important to distinguish between costs associated with delivering and maintaining your product to customers, versus costs to convince customers to purchase that product in the first place. As a reminder, a software company’s customer acquisition cost (CAC) refers to sales and marketing spend, which includes items like personnel, program costs, events, and agency fees.
What is the difference between COGS and operating expenses?
The key difference is that COGS includes the direct costs of creating or delivering a product or service, while operating expenses (OpEx) are the indirect costs required to run the business. OpEx includes things like marketing, sales, rent, utilities, administrative salaries, and software subscriptions not tied to delivering the product. In short, COGS is tied to what you sell; OpEx is tied to how you run your business.
Importance of COGS for customer success.
Understanding the cost of goods sold means that everyone from managers across various departments to investors and analysts can accurately estimate a company’s bottom line and better plan for future customer programs and growth.
In terms of responsibility and categorization, SaaS companies historically include customer support and implementation team costs in their COGS calculations. More and more, Customer Success stays below the margin within sales and marketing. There is no formal rule and it is often a judgment call based on the company’s size and structure.
The importance is consistency in your COGS calculation – make sure your company is consistently and clearly defining which costs are associated with delivering your product, and measuring against that on a regular basis.
Learn how to benchmark and calculate for your SaaS business in this SaaS retention benchmarks Q&A with Rob Belcher of SaaS Capital.