SaaS Financials – Cost of Goods Sold

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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.

Comments

24 responses to “SaaS Financials – Cost of Goods Sold”

December 16, 2009

Steven Wagner

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.

Reply
1. December 16, 2009
  
  davidcummings
  
  Thanks Steven. I enjoyed the anecdotes in Behind the Cloud.
  
  Reply
December 17, 2009

Joe Colopy

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 …

Cheers,
Joe

Reply
1. December 17, 2009
  
  davidcummings
  
  Thanks Joe. I agree COGS aren’t as important as customer acquisition efficiency.
  
  Reply
December 18, 2009

Bessemer 5 Cs of SaaS Finance « B2B Tech Entrepreneur – David Cummings

[…] a comment » Continuing my series of posts of on software as a service (SaaS) financials from yesterday, let’s take a look at Bessemer’s great set of slides online titled the 5 Cs of SaaS […]

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March 15, 2010

Len Bland

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:

Customer Support
Hosting
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.

Reply
1. March 15, 2010
  
  davidcummings
  
  Thanks Len. Any additional information you can provide on this topic would be great.
  
  Reply
August 19, 2011

Lead Liaison (@leadliaison)

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.

Reply
1. August 19, 2011
  
  David Cummings
  
  Thanks for the comment. It is strictly costs for managing the account (not sales related).
  
  Reply
November 21, 2011

Leesa

Hi David

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.

Reply
1. November 21, 2011
  
  David Cummings
  
  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.
  
  Reply
December 14, 2011

Leesa

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.

Reply
1. December 14, 2011
  
  David Cummings
  
  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.
  
  Reply
December 29, 2011

Most Visited Blog Posts of 2011 « 10,000 Startup Hours – David Cummings

[…] SaaS Financials – Cost of Goods Sold […]

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March 13, 2013

Brian K.

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?

Reply
1. March 13, 2013
  
  David Cummings
  
  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
  
  Reply
June 9, 2014

The Most Popular Blog Posts Here | David Cummings on Startups

[…] SaaS Financials – Cost of Goods Sold […]

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August 24, 2014

Economics of Customer Onboarding Programs | David Cummings on Startups

[…] After talking about The Importance of a Customer Onboarding Program, it’s now time to talk about some of the economics of customer onboarding. Many Software-as-a-Service (SaaS) entrepreneurs don’t realize that customer onboarding costs have to be amortized over some period of time and that they affect the cost of goods sold (here’s a separate primer on SaaS cost of goods sold). […]

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September 1, 2014

Gross Margin and SaaS | David Cummings on Startups

[…] percent of revenue left over after the cost of servicing that revenue is taken into account (see SaaS cost of goods sold). For example, with a SaaS company, things like application hosting costs, customer on-boarding […]

Reply
January 13, 2015

Vincent Wong

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

Reply
August 3, 2015

Most Popular Blog Posts | David Cummings on Startups

[…] SaaS Financials – Cost of Goods Sold […]

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August 15, 2017

Katie Bronnenkant

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?
Thanks!
Katie

Reply
January 18, 2020

Premium SaaS Metrics Required for Premium SaaS Valuations – David Cummings on Startups

[…] Margin – The money left after the cost of goods sold are taken out. SaaS company gross margins vary dramatically from the low 60s to the high 90s. […]

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January 19, 2020

Premium SaaS Metrics Required for Premium SaaS Valuations – Learn With Andy

[…] Margin – The money left after the cost of goods sold are taken out. SaaS company gross margins vary dramatically from the low 60s to the high 90s. […]

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