fbpx

March 11, 2022

If you’re running a SaaS business, it’s important to understand how to calculate your cost of goods sold (COGS). This guide will teach you everything you need to know about cost of goods sold for SaaS businesses, including definitions, components and methods for calculation. You’ll also learn how to allocate costs across multiple revenue streams in a SaaS model, and the impact on gross margin and profit.

It can be tricky to determine the Cost of Goods Sold for SaaS, since you are dealing with software and applications. However, it’s important to understand how COGS affects your gross profit and margins. In general, COGS includes any expenses directly related to your product or service production.

For a SaaS company, this could include things like hosting costs, licensing fees, and support services. To calculate COGS, simply add up all of these expenses and divide by the total number of units produced.

What does Cost of Goods Sold for SaaS Mean?

cost of goods sold for SaaS

The Cost of Goods Sold (COGS) is the amount of money that a company spends to produce or acquire the goods it sells. This includes the cost of materials, labor, and delivery directly related to producing and delivering the goods. It does not include indirect costs such as sales commissions or rent.

COGS can be important for businesses to track in order to measure their efficiency and profitability. Click To Tweet

If COGS increases, profits will decrease; if COGS decreases, profits will increase.

The Benefits of COGS

The importance of COGS in a business cannot be overstated. It is essential for calculating the gross profit margin, which provides insights into how well the production process is performing and whether or not the company is profitable. Knowing your gross profit allows you to better manage your overhead costs, rent, loans, and reinvestment.

What is considered COGS in a SaaS Company

We recommend the following for SaaS core revenue:

Hosting costs: These should include all core communications costs and, in the rare case where a company owns or maintains the servers that are used to deliver its product products, depreciation.

Employee Costs Related To Keeping the Production Environment Running

Cost of any Third Party Software or Data: Include all direct employee costs necessary to deliver the ongoing service. These are mainly variable costs that are required to deliver the SaaS app.

In general, if these expenses are not paid, provisioning the product or service to customers with installed bases customers would stop or rapidly deteriorate.

To calculate COGS for SaaS companies, you must include the salaries for the employees who are responsible for maintaining the software’s production instance. COGS should not include any other R&D costs. If your company has more than a negligible amount in professional services revenue, you should report these separately.

ASC 606 (and ASC 340) determine when professional services revenue is to be recognized. This depends on whether they are separate from the delivered product. If they are not sold separately from the SaaS products, they must be allocated over the expected term of customer agreements. SaaS companies may need to recognize professional services expenses when they receive payment, rather than capitalize on them.

What is COGS in a SaaS business? COGS is simply the total cost of producing and delivering your product/service. This could include salaries, rent, marketing costs, and so forth.

It is important that you are aware of COGS in order to make smart decisions about how to reinvest this contribution margin back into your SaaS business.

What should not be included in a SaaS company’s COGS?

When calculating COGS for SaaS companies, there are some things you should consider. Direct variable costs should include sales commissions, software development (amortized and not), product management costs and customer success costs that are focused on cross-selling and upselling. Other overhead costs, which are not directly variable costs, should not be included in COGS.

All businesses in this industry need to know the core gross margin of SaaS license revenue. It is usually 80% to 85%.

How to Calculate COGS? 

cost of goods sold for SaaS

When it comes to calculating COGS for a SaaS company, there is no one-size-fits-all answer. However, a gross margin of 80-90% is generally accepted as being desirable within the industry. This margin level can be used as a benchmark when applying for funding or seeking investors.

It’s important to remember that the cost of goods sold (COGS) equation can be simplified if your company offers subscription-based services with no inventory carried over. In this case, the total costs accrued during the period would be used in the calculation ($49,000 for Company S and $30,000 for Company T).

Calculating Gross Profit and Margin in a SaaS Company

For traditional manufacturing businesses, gross profit and margin calculation are essential. The same is true for SaaS companies. Gross profit includes all costs associated with sales, marketing, director salaries, and leases. The greater the margin, the more you can reinvest and the faster your business can grow.

If both Company S or Company T have equal sales revenue, then Company T will have better margins as it keeps more money after accounting for those revenues. This is due to the difference in customer support, licensing and development costs versus staff-related costs, which are always major expenses for SaaS companies.

Conclusion

Understanding a company’s gross profit is crucial as it can reveal a lot about its financial health. Changes in gross margin over time could indicate problems with management or changes within the market. To generate more revenue per customer, SaaS companies must increase their gross margin.

High gross margins are a key factor in risk mitigation and surviving in tough markets.

The SaaS market is expected to continue to grow, so it is important for companies in this space to have high profit margins. Click To Tweet

Cost of goods sold for SaaS (COGS) is an important metric for any business, but it’s especially critical for SaaS companies. Understanding COGS is essential to calculating your gross margin and profit margins, so it’s important to understand the different components that make up this figure.

In this guide, we’ve covered everything you need to know about costs of goods sold for SaaS companies, including definitions, methods of calculation and how to allocate costs across multiple revenue streams.

You may also like…

0 Comments

Submit a Comment

Your email address will not be published. Required fields are marked *

%d bloggers like this: