After reaching out to one of our company advisors today about advice on software as a service (SaaS) financial metrics, I felt it would be prudent to start documenting them in a series of posts. SaaS, being a newer delivery model, when compared to traditional, installed software, isn’t as well understood with regard to financial metrics.
Generally, cost of goods sold (CoGS) for SaaS companies will include:
- Hosting and monitoring of the application
- Licenses and royalties for products embedded in the application
- Services related to on-boarding the customer
- Support and account management
- Credit card fees and commissions to partners
For more SaaS CoGS info, please see the Dealer Ignition post or the LinkedIn Q&A.
24 thoughts on “SaaS Financials – Cost of Goods Sold”
Glad that you found the post informative. If other public SaaS companies come to mind, please share since the details are interesting.
Another good source for general info is the Salesforce.com book Behind the Cloud by CEO Marc Benioff.
Thanks Steven. I enjoyed the anecdotes in Behind the Cloud.
SaaS financial metrics are definitely a hot topic.
We focus less on COGs (since like with most SaaS companies the gross margins are very high) and more on sales & marketing efficiency.
See Bessemer’s work in this area or Omniture’s magic number. Or perhaps that’s the topic of a future blog post …
Thanks Joe. I agree COGS aren’t as important as customer acquisition efficiency.
This post is exactly what I was looking for. I am often called upon to prepare projections for SaaS companies looking for capital.
The Dealer Ignition post was excellent as well.
I will plan to include:
Third Party fees
On boarding costs
I will also prepare an estimate of the cost of customer acquisition and customer turnover as meaningful information for SaaS.
Thanks Len. Any additional information you can provide on this topic would be great.
Hello David – I saw your post. Can you clarify what you mean by “Account Management”? Is this paying for a “sales guy” or is costs strictly associated with managing an existing customer? If it’s the latter, what *type* of account management costs are there? A handful of examples of account management costs would be very helpful.
Thanks for the comment. It is strictly costs for managing the account (not sales related).
A quick question, even in the SaaS business when selling to many enterprise accounts it can take 2-3 years for a company license. How does the CACs cost reflect a 2-3 year deal cycle?
i look forward to your advice.
Good question. For CAC with a 2-3 year deal cycle, I’d pay close attention to sales and marketing spend in one quarter vs new recurring revenue in the following quarter (the Omniture Magic Number). Even with a long sales cycle this is a relevant metric.
Thanks for answering this question. Another question I have for you is around COGS – if you had an analyst team that delivered business intelligence through the SaaS platform, would you not include these in your COGS ? In my eyes, whilst we should of course include the usual costs assocaited with building and hosting our SaaS, as a BI provider, without the analysts our SaaS platform would have little value. Let me know your thoughts.
I agree that if you have on-going human labor required to work on client data to deliver your service those should be in COGS.
David, even 2 years later i am finding this topic very relevant. The one thing i struggle with is consistency across Client Acquisition Costs, Sales/Partner Commissions, and Sales Rep Salaries. If CACs and partner commissions should be included in Cost of Sales, why wouldnt the salaries of sales reps and their related sales commissions be included? I would think these would all fall under cost of acquisition. Thoughts?
We always included sales rep salaries in cost of customer acquisition but not in cost of goods sold since they aren’t required to keep servicing an existing customer
Dave, great post – I’m reviewing the way we do accounting for our China based startup and this is very useful. I noticed that both links to the “Dealer Ignition” post and LinkedIn Q&A are both down – do you have the content available anywhere else? Cheers,Vincent
David, The two links at the bottom for Deal Ignition and LinkedIn Q&A are dead. Is there anywhere else that you can point to that info?