In the SaaS business model, what are the typical components of COGS?
It seems to me that COGS needs to be calculated somewhat differently in a SaaS business as compared to a traditional software company but I have not seen any examples illustrating what specific variable costs are acceptable in the COGS section of an income statement under GAAP.
Does it boil down to fixed cost allocation?
Clarification added December 31, 2008:
Thanks for the insightful replies. I've responded to some of you individually, but i wanted to post some further information for people who might view this question later.
In addition to cost of royalties which has been mentioned, I can clearly identify variable marketing costs as well as variable support costs.
Also, as mentioned above, certain operational costs (particularly hosting and associated costs) are closely related to the cost of service delivery.
However, I wasn't sure how to allocate managed hosting costs as variable costs for COGS purposes because the managed hosting platform my client currently uses can scale from 0 to several hundred thousand users without much variance in the cost to my client. So it doesn't seem to lend itself well to the traditional ideas of variable operational costs which have a more linear relationship to "units" sold. Are there standard practices for how to allocate the relatively fixed cost of hosting as a variable Cost of Sales?
Thanks,
Dave
Good Answers (2)
Betty K.
CFO for high tech startups and early stage firms
Best Answers in: Small Business (2), Starting Up (2), Accounting (1), Foreign Investment (1), Corporate Taxes (1), Mergers and Acquisitions (1), Tax Law (1), Quality Management and Standards (1), Distribution (1)
SaaS COGS include those costs which would not exist if it were not for the SaaS. in addition to the non-SaaS COGS, SaaS-specific COGS include:
- purchase or lease of servers, networking equip and software needed to provide the service.
- third party costs for managed servers, hosted software that are needed to provide the service
- royalties and other items mentioned by other posters
Clarification added December 31, 2008:
Dave: in response to your question about allocating managed hosting costs....
what most folks are doing (and i fully agree with) is to divide their hosting costs into three components:
a) administrative stuff (Exchange server, email, disaster recovery backups) which is expensed as G&A opex
b) R&D stuff (non-production/test system) which is expensed as R&D opex
c) the customer-facing production systems which are charged 100% to COGS. even if there are only a few users, the entire cost of the customer-facing systems need to be charged to COGS. it's not uncommon to have negative margin in the early days
An interesting question Dave. Dobes is correct of course that it is unlikely in a pure SaaS model that you would have any cost of goods sold to book. You might however have some royalty fees that you need to pay to 3rd parties based on your sales/revenues, which could be reported in a cost of sales bucket prior to your expenses one if they are significant. Thus the P&L (simplified) would read: Gross Rev - COS - Net Rev - Expenses - Profit/Loss.
If there is a particular cost that you are questioning where it belongs, perhaps you could add that info as a clarification.
HNY!
Bob
More Answers (1)
The last "S" is SaaS is "Service" - SaaS is about offering services and not goods and thus there is probably no cost of goods sold. Costs of providing a SaaS are just plain old costs of operations.
