http://www.techcelerate.ventures
Your Chief Funding Officer for raising Seed and Series A
Surprisingly, GAAP does not have a clear definition of what should be included in a SaaS company’s Cost of Services (COS), also commonly called Cost of Goods Sold (COGS), so each company is pretty much left to their judgment on what should be included. Having reviewed thousands of SaaS company financials, we have seen the full range of COS definitions, and through that exposure, we have come up with the recommendation outlined below
www.saas-capital.com
COGS
PAGE 1
SAAS GROSS MARGINS: BENCHMARKS AND DEFINITIONS
Surprisingly, GAAP does not have a clear definition of what should be included in a SaaS company's Cost of Services (COS),
also commonly called Cost of Goods Sold (COGS), so each company is pretty much left to their judgment on what should
be included. Having reviewed thousands of SaaS company financials, we have seen the full range of COS definitions, and
through that exposure, we have come up with the recommendation outlined below. This recommendation is derived from
three factors:
1.
It is generally the most common definition we see.
2. Using a common definition allows your company's financials to be easily compared to others.
3. We believe it to be the most useful from a management perspective.
First off, if your company has more than a negligible amount of professional services revenue from implementations or
ongoing services, it is a good idea to report those costs and revenues separately. Implementation is a different business
than the ongoing provisioning of a SaaS
product, and a company should not mix the
revenue and cost of each because it obscures
the core economics of both businesses.
Without knowing a gross margin on just
SaaS license revenue, things like CAC Ratios
cannot be accurately computed. Also, a SaaS
business should absolutely know it is making
or losing money on professional services, and
it should be doing so intentionally.
In terms of COS for the core SaaS revenue we recommend the following:
1. Hosting Costs
2. Employee costs related to keeping the production environment running
3. Employee costs for customer support/success of the application, but excluding costs for upsells, or cross-sells
4. Cost of any third-party software or data that is included in your delivered product
5.