Cost of Goods Sold (COGS) refers to the cost to deliver the “good.” For SaaS companies, these are items that a single customer will need once they purchase the software. They tend to be infrastructure and customer support costs, such as:
- Site operations costs (hosting, fees, association personnel)
- Support personnel
- Software implementation costs
- Training and onboarding costs
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.
For SaaS companies, COGS are in the range of 5% to 40%. Higher COGS are generally influenced by more complex software implementation or service costs.
EXAMPLE:
Your customer’s COGS include:
- 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
Your monthly COGS is $60,650 ($8,750 + $4,100 + $12,300 + $3,500 + $32,000). If your total monthly revenue is $200,000, then your percentage of COGS to revenue is 30% and your gross margin is 70%.
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