Software COGS and Gross Margin Guide for SaaS
Accurately categorizing SaaS Cost of Goods Sold (COGS) is essential for measuring gross profit margins. Software founders often misclassify server infrastructure or customer support salaries as general operating expenses, overstating gross margins.
Proper COGS accounting ensures financial metrics accurately reflect direct variable costs as customer account volumes scale.
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What Belongs in SaaS Cost of Goods Sold?
SaaS COGS includes direct operational costs required to deliver the software service to active users:
- Cloud Hosting & Infrastructure: Amazon Web Services (AWS), Google Cloud Platform (GCP), and Azure hosting fees.
- Third-Party APIs: Embedded payment gateways (Stripe, PayPal), SMS gateways (Twilio), and AI model APIs.
- Customer Support Personnel: Salaries and benefits for support reps assisting active users.
- Software Delivery Tools: Monitoring, security, and deployment tools directly serving production traffic.
What Should Be Excluded from COGS?
Do not include R&D engineering salaries for new features, marketing ad campaign spend, sales rep commissions, or administrative rent in COGS. These expenses belong in operating expenses (OpEx).
Calculate your company's gross profit metrics instantly using our free Gross Margin Calculator.
