What are common misconceptions about Cost of Goods Sold?

Common misconceptions include: SaaS has zero COGS. Actually, hosting, support, and third-party services create real per-customer costs. Also, COGS is fixed. Actually, COGS scales with customers and usage, though often at a lower rate than revenue..

Glossary

What is Cost of Goods Sold?

The direct costs incurred in delivering your product or service to customers, including hosting, third-party tools, support, and customer success costs in a SaaS context.

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In Depth

Understanding the Details

COGS for SaaS differs from traditional businesses. There's no physical product to manufacture, but there are real costs to deliver the service: cloud hosting and infrastructure, third-party APIs and tools baked into the product, customer support team costs, customer success costs, and payment processing fees. COGS directly determines gross margin — one of the most scrutinised SaaS metrics. A company with £1M revenue and £300K COGS has 70% gross margin. Healthy SaaS gross margins typically range from 70-85%. COGS below 70% suggests expensive infrastructure, heavy service requirements, or expensive third-party dependencies that should be evaluated.

Examples

How It Works in Practice

COGS breakdown

Monthly COGS of £30K: hosting £12K, third-party APIs £8K, support team £7K, payment processing £3K, against £100K revenue = 70% gross margin.

COGS optimisation

Renegotiating cloud hosting contracts and optimising database queries reduces hosting costs by 30%, improving gross margin by 4 percentage points.

Segment COGS analysis

Enterprise customers require dedicated support, raising their COGS. But their higher revenue still yields better margins than SMB.

Importance

Why It Matters

COGS determines gross margin, which determines how much revenue is available for growth, R&D, and profit. Managing COGS is essential for SaaS financial health.

Misconceptions

What People Often Get Wrong

SaaS has zero COGS. Actually, hosting, support, and third-party services create real per-customer costs.

COGS is fixed. Actually, COGS scales with customers and usage, though often at a lower rate than revenue.

Only finance needs to understand COGS. Actually, product and engineering decisions directly impact COGS through infrastructure and tool choices.

Our Approach

How We Handle Cost of Goods Sold

We help optimise COGS through efficient infrastructure, smart third-party tool selection, and operational improvements that protect and improve gross margins.