Cost of goods sold for Software-as-a-Service (SaaS) startups seems like it should be a straightforward topic but there are a number of different conflicting reports online. According to Wikipedia, cost of goods sold “refers to the inventory costs of the goods a business has sold during a particular period.” Of course, due to the nature of software, there is no inventory but there are costs to deliver the application.
Here’s what we include in our cost of goods sold calculation:
- Hosting fees (our highest expense after salaries and benefits)
- Third-party web fees like content delivery networks, embedded software, etc
- Support personnel costs
- Customer on-boarding costs (e.g. client implementation personnel costs)
- Note: Credit card fees and other billing fees often are not cost of goods sold for SaaS companies and are instead general and administrative fees
Notice things like software development costs, customer acquisition costs, and more aren’t included since they are not required once the customer has already been signed. SaaS cost of goods sold is an important metric so that gross margin can then be calculated.
What else? What are some other items that should be considered as part of cost of goods sold for SaaS companies?
Those are exactly what we include. Thanks for sharing. I’ve heard a few SaaS folks say their gross margins are 100%, and when pressed, insist that it’s simply not worth the extra effort to account for hosting or support under COGS. For us, gross profit margin is an extremely important number, and well worth the minuscule extra effort to track COGS.
Thanks for detailing this. I had to search longer than I probably should have even to find out how to calculate gross margin.
Hi David, Thanks for your details here. In reviewing your prior post from a few years back, I was struck by the different treatment of credit card fees. It seems like there’s mixed opinion on this cost category for saas operators. Seems like a direct, reoccurring cost that is central to product delivery. Seems pretty COGS-y to me. Can you help us understand your shift in perspective? -Sam
I reached out to publicly traded companies to see how they did it and they treat credit card fees that way, so I followed their lead.
We include credit card processing fees in COGS, though I can appreciate why some don’t. Credit card processing fees aren’t required for one to earn the money; they merely help one collect it.