What Is COGS in SaaS?
In a traditional business, COGS includes the direct costs of producing goods—materials, labor, and shipping. In SaaS, however, there’s no physical product. So what counts?
COGS for SaaS typically includes:
- Hosting infrastructure (e.g., AWS, Google Cloud)
- Software licenses or third-party tools directly supporting product delivery
- Customer support team costs
- Onboarding and implementation labor (if required to activate a user)
- Maintenance and uptime monitoring services
It does not include:
- Sales and marketing
- Product development (R&D)
- Executive salaries
- Customer success not involved in support
These distinctions matter because including non-COGS expenses inflates your costs and understates your gross margin—a critical metric for SaaS valuation.
Why COGS Matters in SaaS
Gross margin (Revenue – COGS) tells you how much money is left over to cover operating expenses and invest in growth. It’s also a key metric investors use to evaluate SaaS scalability.
For context:
- Healthy SaaS gross margins often fall ~85% (between 80% to 87%).
- Anything lower could suggest inefficient delivery or high support costs
If you want a deeper dive into SaaS metrics, check out our article on The SaaS Magic Number—it explains how gross margin plays into revenue efficiency.
Optimizing COGS for Better Margins
Here are a few ways to reduce your COGS:
- Negotiate cloud infrastructure discounts based on usage tiers
- Automate onboarding and reduce manual setup tasks
- Implement tiered support to match customer value with effort
- Outsource non-core functions at scale to lower-cost providers
To read how smart SaaS founders reduce COGS while scaling, visit our guide on Avoiding Product Mistakes.
Final Thought: Don’t Just Grow—Grow Profitably
Too many SaaS founders focus solely on revenue. The most successful ones know how to engineer high-margin growth from the start. Understanding and managing your COGS isn’t bookkeeping busywork—it’s a strategic advantage.
For a full walkthrough on how to prepare for an investor-grade financial profile, see our comprehensive guide to Bookkeeping for SaaS Companies.Additional Resources
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How to Scale and Grow a SaaS Business
