Cost of goods sold
KOGZ
The direct costs of delivering your product to customers. For SaaS: hosting, support, professional services, and third-party software costs.
COGS are the costs directly tied to delivering your product. In manufacturing, COGS is raw materials and factory labor. In SaaS, COGS includes hosting and infrastructure (AWS, GCP, Azure bills), customer support team costs, professional services delivery, and any third-party software baked into your product.
COGS does not include sales, marketing, engineering, or G&A. Those are operating expenses. The distinction matters because revenue minus COGS equals gross profit, and gross profit is what funds everything else.
For SaaS companies, COGS should be 15-30% of revenue, yielding gross margins of 70-85%. If COGS exceeds 35% of revenue, you need to investigate. Are infrastructure costs scaling faster than revenue? Is the support team growing faster than the customer base? Are professional services being given away at a loss?
Examples
A SaaS company breaks down COGS.
Revenue: $10M. AWS hosting: $800k. Customer support team (5 people): $600k. Third-party API costs: $200k. Professional services delivery: $400k. Total COGS: $2M. Gross margin: 80%.
AI inference costs spike COGS.
After adding AI features, the company's GPU costs jump from $100k/month to $500k/month. COGS increases by $4.8M annually. Gross margin drops from 82% to 64%. The team implements caching and model optimization to bring inference costs down.
Professional services drag on COGS.
The company offers free implementation as a sales incentive. Implementation costs $15k per customer. At 200 customers, that is $3M in COGS that could have been billed. The CFO implements a pricing change: basic implementation included, custom implementation billed at $200/hour.
In practice
Read more on the blog
Frequently asked questions
What is included in SaaS COGS?
Hosting and infrastructure costs, customer support salaries and tools, professional services delivery costs, third-party software and API costs embedded in the product, and DevOps/SRE team costs for running production systems. Sales, marketing, engineering (building new features), and G&A are not COGS.
How do you reduce COGS in a SaaS company?
Optimize infrastructure costs (reserved instances, right-sizing, multi-cloud), automate customer support (self-serve docs, chatbots), charge for professional services instead of giving them away, and negotiate better rates with third-party vendors as you scale.
Related terms
Revenue minus cost of goods sold, expressed as a percentage. For SaaS, this is revenue minus hosting, support, and delivery costs.
The annualized value of your active subscription contracts. The heartbeat metric of every SaaS business.
The revenue and cost associated with a single customer. Profitable unit economics mean each customer generates more revenue than they cost to acquire and serve.
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