SaaS COGS vs. OpEx is a common discussion in my courses and with my clients.
What should I include in SaaS cost of goods sold (COGS)?
Quick guide below and why this is important. #saas
What departments are included in SaaS COGS?
For pure-play SaaS, your COGS structure should include:
1⃣Technical Support
2⃣Professional Services
3⃣Customer Success
4⃣Dev Ops
Of course, CS is up for debate depending on their role.
Dev Ops = Cost of Ops in my examples
📌Technical Support
They manage inbound customer contact regarding product bugs and how-to's.
💡Typical Expenses: Wages, payroll taxes, benefits, travel, training, internal software subscriptions
💡Margin: Included in recurring gross margin
📌Professional services
Implement and configure the software and train customers on its use.
💡Typical Expenses: Wages, payroll taxes, benefits, billable travel, travel, training, internal software subscriptions, PSA software
💡Margin: Included in your services gross margin
💡Customer Sucess
📌Help customers adopt your product and identify potential customer expansion.
💡Typical Expenses: wages, taxes, benefits, internal use software (i.e. GainSight), regional user groups, promotional swag, etc.
Margin: included in recurring gross margin
📌Dev Ops
Maintain hosting infrastructure (i.e., AWS, Azure), customer upgrades, and hosting service level agreements (SLAs).
💡Typical Expenses: hosting, R&D amortization, third-party software embedded in our products
💡Margin: included in recurring gross margin
Why is COGS vs. OpEx Important?
1) We must understand our overall gross margin and margins by revenue stream. 2) We must understand our OpEx profile. How much are we investing and how will that trend? 3) Many SaaS metrics require a GM % input.
It's a financial framework that measures revenue growth vs profit margins. The Rule of 40 determines the health and/or attractiveness of your business. To CFO’s, it adds financial discipline to your decision-making process.
How to Calculate the Rule of 40
Rule of 40 = growth % + profit margin
If revenue growth is 15%
and profit margin is 20%
Your rule of 40 number is 35%
Can you have negative inputs? Yes, that’s the meaning of the Rule of 40.