Cost of goods sold (COGS)
Definition
Cost of Goods Sold (COGS) is the direct cost incurred by a company in order to provide a good or a service.
For SaaS companies, these are costs that are specific to each individual customer upon purchase of the software. They include but are not limited to:
Software implementation costs
Support personnel costs
Site operations costs (hosting, fees, personnel wages)
Training and onboarding costs.
Other typical business costs such as software development or marketing acquisition are not included in COGS as they are unique to each individual and wont change with the purchase of software by a new customer.
Example:
Your customer’s COGS include:
Internal engineering support: $2,100
Hosting Fees: $5,150
Third party and/or transaction fees: $3,100
Customer support: $10,000.
Your COGS is the sum of these expenses which is $20,350. If your revenue for this service is $100,000 then your COGS percentage is 20.35% and you have a gross margin of 79.65%.
Why do I need to calculate my COGS?
The cost of goods sold calculation tells you how much money you've spent on producing your products or providing your services over a given period of time (usually one year). It's important for businesses to track this figure because it allows them to understand how much money they're spending on producing their goods or services, allowing them to price their product to ensure a strong level of margin.
What is the difference between COGS and expenses?
There are many differences between COGS and expenses, but the main difference is that COGS are directly related to the production of your product/service , while expenses are any items that are not directly tied to a product's sale or production.For example, if your company pays $50,000 in rent per year, then that money is an expense, because it doesn't go towards making a specific product or service.
What is the typical level of COGS in SaaS
COGS range between 5% and 35% in SaaS industries. Higher COGS usually occur due to complex software implementation, costs or the dependence on large support teams.
