Cost of goods sold (COGS)

What is COGS, Cost of goods sold

Cost of goods sold (COGS) is a financial metric that measures the direct costs associated with producing and delivering a company's products or services. It is used to evaluate a company's profitability and is an important metric for SaaS companies to measure the direct costs associated with providing their subscription-based services, such as hosting and data storage costs.

Why COGS, Cost of goods sold is important

COGS is an important metric for SaaS companies because it measures the direct costs associated with providing their subscription-based services. It allows companies to understand how much they are spending to provide their service and how much profit they are generating from each customer. This information can be used to make informed decisions about how to allocate resources, such as budget and personnel, in order to maximize profitability.

How COGS, Cost of goods sold is calculated

COGS can be calculated by adding up the direct costs associated with producing and delivering a company's products or services. For SaaS companies, this includes costs such as hosting and data storage costs, as well as direct labor costs for maintaining and updating the service.

The formula for COGS is: COGS = Direct Materials + Direct Labor + Direct Overhead

Examples of costs that are included in COGS for SaaS companies:

• Hosting and data storage costs

• Direct labor costs for maintaining and updating the service

• Costs associated with acquiring and integrating new technologies

Examples of costs that are excluded in COGS for SaaS companies:

• Sales and marketing expenses

• Administrative expenses

• Research and development expenses

• General and administrative expenses

Examples of companies with low COGS:

• Zoom: Zoom's COGS is low as a result of its efficient use of hosting and data storage resources

• Slack: Slack's COGS is low as a result of its efficient use of hosting and data storage resources and use of cloud providers

• Salesforce: Salesforce's COGS is low as a result of its efficient use of hosting and data storage resources and use of cloud providers

How to improve COGS, Cost of goods sold

There are several ways that SaaS companies can improve their COGS, including:

• Reducing hosting and data storage costs: By reducing the costs associated with hosting and data storage, SaaS companies can decrease their COGS. This can be done by switching to more cost-effective hosting providers, or by implementing more efficient data storage systems.

• Outsourcing development: By outsourcing development work, SaaS companies can reduce their direct labor costs, thus decreasing their COGS.

• Improving efficiency: By improving the efficiency of their operations, SaaS companies can reduce their direct overhead costs and thus decrease their COGS.

Why investors value low COGS, Cost of goods sold

Investors value companies with low COGS, because it indicates that the company is able to provide its service at a low cost, which translates into higher profitability. A low COGS also means that the company has a high Gross Margin and has a better chance of achieving sustainable revenue growth and profitability.

In terms of valuation at exit, a low COGS is a great indication that the company is able to provide its service at a low cost, which translates into higher profitability. This is why investors value low COGS as it is an important factor in determining the overall value of the company.

How COGS, Cost of goods sold relates other SaaS metrics

COGS is closely related to other SaaS metrics such as Gross Margin, Monthly Recurring Revenue (MRR), and Customer Acquisition Cost (CAC). Gross Margin measures the profit a company generates after deducting COGS from its revenue, while MRR measures the total recurring revenue a company generates each month. CAC measures the cost of acquiring a new customer. A low COGS in conjunction with a high Gross Margin, high MRR and low CAC, can indicate a strong and efficient sales and marketing strategy, as well as a sustainable revenue growth and profitability. Additionally, it is also important to look at the COGS along with other key financial metrics such as Operating Margin, Net Income, and EBITDA to gain a comprehensive understanding of the company's overall financial performance.

Conclusion

In conclusion, COGS, Cost of goods sold, is a financial metric that measures the direct costs associated with producing and delivering a company's products or services. It is important for SaaS companies to understand their COGS in order to make informed decisions about how to allocate resources, such as budget and personnel, in order to maximize profitability. Companies with low COGS are valued by investors as they indicate a low cost to provide the service, high Gross Margin, and better chances of achieving sustainable revenue growth and profitability. SaaS companies should track their COGS alongside other key metrics such as Monthly Recurring Revenue (MRR), Customer Acquisition Cost (CAC), and Gross Margin to gain a comprehensive understanding of their financial performance.

Sources

• "SaaS Metrics 2.0: A Guide to Measuring and Improving What Matters" by David Skok

• "The Ultimate SaaS Metrics Cheat Sheet" by Christoph Janz

• "The SaaS Metrics That Matter" by Lincoln Murphy

• "The Anatomy of a SaaS Metrics Dashboard" by Joel York

• "The Complete Guide to SaaS Metrics" by OpenView Partners

• "The Key SaaS Metrics Every Startup Should Track" by Aaron Ross

• "The SaaS Metrics Bible" by Tom Tunguz

• "The SaaS CFO Playbook: Building and scaling a SaaS company" by Jason Lemkin

• "SaaS Financial Metrics: How to Measure and Improve the Health of Your Business" by David Skok

• "SaaS Metrics 101: Understanding and Optimizing Your Key Performance Indicators" by David Carr

• "SaaS Metrics: The Definitive Guide" by SaaStr

• "Mastering SaaS Metrics: A Step-by-Step Guide to Measuring and Optimizing What Matters" by Nick Mehta