Software Growth

COGS (Cost of goods sold) for SaaS

In SaaS, COGS is the direct cost of delivering and supporting your software, mainly hosting, support staff, third-party services and payment fees.

COGS stands for cost of goods sold. A software product has no physical goods, so in SaaS it means the direct costs of keeping the product running for paying customers. Subtracting COGS from revenue gives gross profit, and dividing by revenue gives gross margin.

How to calculate it

Example: a product has $30,000 in monthly revenue and COGS of $7,500, made up of $3,000 hosting, $2,500 support salaries, $1,200 third-party APIs and $800 payment processing.

What counts as COGS

The a16z guide says every cost of manufacturing, delivering and supporting the product belongs in the gross margin calculation. For SaaS, the usual items are:

  • Hosting, databases, storage, bandwidth and monitoring tools.
  • Licenses and APIs embedded in the product (email sending, SMS, AI models, maps).
  • Customer support and customer success time spent keeping existing customers running.
  • Payment processing and marketplace fees.
  • Implementation or onboarding work you do for customers.
  • Engineers working on-call or on infrastructure, if they are keeping the service running rather than building new features.

What does not count

Sales and marketing, research and development of new features, and general administration are operating expenses, not COGS. Customer success teams that focus on upsells and renewals are often split, as Bessemer notes that its CAC payback definition includes success costs tied to renewal and expansion.

Why classification matters

Where you draw the line changes your gross margin, and investors compare it against other companies. Moving $2,500 of support staff out of COGS in the example above would lift margin from 75% to 83%, without anything changing in the business. If you plan to be acquired or raise money, classify costs the same way every period and write down your policy.

Small SaaS specifics

Founders often forget their own time. If you answer support tickets two hours a day, a fair share of your pay is COGS. The same goes for free-plan hosting. These costs rarely show up in a bank statement, but they reduce what each paying customer really contributes. For a stricter variable-cost view, see contribution margin.

Mistakes

  • Ignoring cost growth from AI or usage-heavy features.
  • Counting a flat hosting bill as variable when it does not change with customers.
  • Mixing capitalized development costs into COGS inconsistently.

Sources

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