Accounting & Tax

Cost of Goods Sold (COGS)

Definition

Cost of goods sold (COGS) represents the direct costs attributable to producing or delivering a company's product or service. For SaaS companies, COGS typically includes hosting infrastructure, payment processing fees, customer support, and third-party software costs that scale directly with usage or customer count.

Formula

COGS = Beginning Inventory + Purchases − Ending Inventory (for physical goods) For SaaS: COGS = Hosting + Payment Processing + Direct Support + Third-Party Software

Overview

Cost of goods sold (COGS) captures every direct cost associated with delivering your product to customers. In traditional businesses, COGS includes raw materials and manufacturing labor. For SaaS, the equivalent includes cloud hosting (AWS, GCP, Azure), payment processing fees (Stripe, PayPal), direct customer support costs, DevOps personnel, and third-party API costs that scale with usage.

Properly categorizing COGS is critical because it directly determines gross margin, which is a primary metric investors use to evaluate business model quality. A common mistake is including engineering salaries in COGS. R&D salaries belong in operating expenses, not COGS, unless those engineers are performing direct customer support or implementation work.

SaaS COGS benchmarks vary, but most healthy companies keep COGS at 15–30 % of revenue, yielding gross margins of 70 to 85 %. If COGS is significantly higher, founders should examine whether infrastructure is over-provisioned, if third-party API costs are excessive, or whether the support model is too labor-intensive.

Example

A SaaS company with $100K monthly revenue has $8K hosting, $3K Stripe fees, $7K support staff, and $2K third-party APIs = $20K COGS, yielding 80 % gross margin.

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