What is COGS?
Cost of Goods Sold (COGS) represents the direct costs of producing and delivering your product or service. For SaaS companies, this typically includes hosting, third-party software, and customer support costs.
COGS is subtracted from revenue to calculate gross profit. It excludes operating expenses like sales, marketing, and R&D, which come out of gross profit.
SaaS COGS Components
Cloud infrastructure (AWS, GCP, Azure). Third-party software and APIs integrated into the product. Customer support and success teams directly serving customers. DevOps and site reliability engineering. Payment processing fees.
Why COGS Matters
COGS directly determines your gross margin, which is a key indicator of business model quality. High COGS means low margins and less money for growth. Optimizing COGS improves profitability without cutting investment.
COGS in Ecommerce
For ecommerce, COGS includes product cost, shipping, packaging, and fulfillment. Margins are much tighter than SaaS, making COGS optimization critical for profitability.
Gross Profit = Revenue - COGS
Gross Margin % = (Revenue - COGS) ÷ Revenue × 100
SaaS COGS breakdown:
- Cloud hosting (AWS): $30,000
- Third-party APIs: $12,000
- Customer success team: $45,000
- DevOps/infrastructure team: $25,000
Total COGS = $112,000
If revenue is $500,000:
Gross Profit = $388,000
Gross Margin = 77.6%