Cost of Goods Sold (COGS) for Software-as-a-Service (SaaS) Business
When we at OpenView consider a company for venture funding, the Gross Margin is an important indicator of how profitable and scalable the business is. When a company that looks to raise venture capital funding is a SaaS company, the criterion for the Gross Margin does change.
Typically, a good SaaS business model should have a gross margin of about 80-90%. This means that the Cost of Goods Sold should be around 10-20% of the total Revenue.
The product that the SaaS companies provide is a software enabled service, mainly delivered over the Internet. Therefore, the items that comprise the COGS for this business model are different from those found in the COGS of traditional Software businesses.
This is a list of the general costs that comprise the COGS for a SaaS business and are not part of the Operating Expenses:
- Application hosting and monitoring costs
- Customer support and account management costs
- Data communication expense
- Software license fees for products embedded in the application
- Website development and support costs
- Professional services and training personnel costs
- Costs of subscriptions
If you’re building a B2B SaaS company and you’d like to talk strategy or fundraising, we want to hear from you. Please reach out to [email protected].
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Editor’s note: This post was updated on April 20, 2020.