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?