2/20/2023 0 Comments Cogs cost of goods sold![]() ![]() ![]() ![]() As a result, SaaS finance teams struggle to figure out what to account for as COGS, let alone forecast and provision technology costs with accuracy.Īdditionally, engineering leaders cannot explain to finance (and to the C-Suite) how engineering activities impact the company’s overall profitability. There are also no rules as to what to include in a SaaS P&L as COGS. Expenses directly related to the creation and operation of your revenue source.ĬOGS does not include general administration, R&D amortization, product development, internal operations, upselling, rent, commissions, or data center maintenance.Employee salaries, training, and onboarding costs incurred by customer support personnel who ensure that customers can use your software hassle-free.Transactional costs, such as cost of travel and billing.Payments for software licenses or subscriptions that directly support the development and running of the software-enabled service you depend on for revenue.Cloud costs such as Amazon EC2 and S3 bills, application performance monitoring (APM) fees, and infrastructure monitoring and security fees, etc.The cost of hosting applications like Amazon Web Services (AWS).So, what costs should you consider COGS in a SaaS? SaaS COGS Examples: What Should You Consider COGS In A SaaS Company?Ī SaaS company's cost of goods sold includes: Cost of revenue also includes indirect expenses such as the commissions you'd pay your sales staff and the shipping costs of raw materials. Meanwhile, operating costs represent the costs incurred to run and support your entire business, not just the software-enabled services you provide.ĬOGS also differ from cost of revenue in that the latter applies when you sell a physical product. What is the difference between COGS and operating costs?ĬOGS reflect how much you spend on building and supporting the software services that your customers purchase. Some equate operating expenses (OPEX) with cost of goods sold (COGS), which is inaccurate and could have negative consequences, such as reducing your share price. Many SaaS companies over-report their COGS because they are unsure what they should include in their cost of goods sold reports. COGS for SaaS differs from traditional software companies that create a physical software copy and distribute it. These services are software-enabled and distributed over the internet, which makes them unique. COGS are also referred to as cost of sales. With that in mind, I’d like to share some of my recommendations for discussing cost with your leadership team - and hope it might help you have stronger cost conversations.Ĭost of goods sold (COGS) in a software-as-a-service (SaaS) company refers to the direct costs you incur in building and running subscription-based software services. In my experience, positive discussions about cost tradeoffs can help your team make better decisions about everything from roadmap prioritization to pricing models. If you frame things well, though, you can have more productive conversations that lead to greater alignment between engineering and the rest of the business. However, it can be challenging to translate complex engineering concepts to business leaders. So it’s no surprise that many of us are increasingly responsible for answering questions and reporting about costs to our executive teams - and in some cases, the board. When you lead engineering for a company running on AWS, every technical decision you make can have an impact on your profit margin. ![]()
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