Saas Costs and Gross margins
Traditionally, headcount within any company is considered the biggest expense, eating into your gross margin. But what if there is something else steadily draining your profits? SaaS costs, these essential yet often overlooked software subscriptions, can also significantly impact your bottom line.
The reason? Businesses often neglect to factor SaaS costs into their Costs of Goods Sold (COGS). This oversight can lead to skewed financial reporting and a misleading understanding of your true profitability.
This article sheds light on SaaS COGS and why it should be taken into consideration while calculating your gross margins. Also, at the end, find tips to take control of COGS. Keep reading!
What is COGS and Why does it Matter?
COGS, short for Cost of Goods Sold, is the total of all the direct costs that a company incurs to deliver its products and services.
Now, you might be wondering why it matters. Well, Gross Margin is a crucial metric for businesses. It’s the percentage of revenue remaining after accounting for COGS. Here's a simple formula:
Total Revenue - COGS = Gross Margin
As you can see, calculating COGS impacts your Gross Margin percentage directly. Since GM is an important indicator of a company's profitability and scalability, thus accurately accounting for all your SaaS costs is essential.
By proactively monitoring and optimizing your COGS, you can improve your profitability and free up resources for further growth. In the next section we'll break down SaaS spend and explore strategies for keeping your COGS under control.
Breaking Down Your SaaS Costs to Take Control of Your COGS
COGS for SaaS isn't only limited to the development and maintenance of your core product. It encompasses all the expenses associated with running your services. However there are some costs which aren’t considered as COGS. We’ll talk about them also.?
But here’s where you should get started:?
Start by identifying software subscriptions used across different departments.
However deciding whether a department's costs belong in COGS can be tricky. It depends on how the department directly contributes to creating and delivering your core SaaS product.
For instance, sales & marketing automation (HubSpot, Mailchimp) tools help acquire and nurture customers, which is important for any business but not directly involved in building or running the core SaaS product. So, their costs typically wouldn't be part of COGS.
However, there are exceptions. Imagine a SaaS product specifically designed for email marketing. In that case, Mailchimp might be considered as COGS because it's directly enabling the core service.
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The key takeaway is to analyze each department's role in creating and delivering your product. Costs directly tied to that core function might belong in COGS, while others wouldn't.
Next, analyze the cost associated with your IT infrastructure, including servers, storage solutions, and network security servers. Be sure to include the cost of employee devices like laptops and mobile phones, along with associated support plans.
Cloud platforms have become paramount for businesses today. While they offer an array of services and keep your business secure, it's easy to lose track of underutilized resources. Scrutinize your cloud spending across platforms like AWS, Azure, or GCP. Also, take into consideration services such as EC2, S3, performance monitoring, and infrastructure monitoring while calculating cloud expenses.
Companies use platforms like Slack, Zoom, or Microsoft Teams for communication and collaboration. When they are used for internal communication, they won't be considered as COGS, but if they are used to serve customers of business, then they will be regarded as COGS.
However, any document management or e-signature software like DocuSign won't be considered COGS.
How to Take Control of Your COGS
The first step to take control of your COGS is to stop looking at total expenses as one and break it down. Analyze individual subscriptions across departments – marketing tools, design software, and project management platforms – to identify areas for improvement.
Subscription management tools like Livlyt offer a comprehensive view by acting as a central hub, showcasing a 360° view of your software licenses, usage patterns, and spending.
With Livlyt, you gain a unified view of all your SaaS subscriptions. It unveils usage insights, allowing you to track how each tool is truly utilized. This data helps you make informed renewal decisions, focusing resources on the software that drives value.
Livlyt goes beyond just showing what you have. It also helps you procure SaaS better. Imagine getting the best deals on software directly from your dashboard, saving time and money. Livlyt unlocks access to unbeatable discounts on your favorite apps and even finds offers recommended by your peers.
By leveraging SaaS management tools like Livlyt, you can save up to 30% on your SaaS spending. You'll finally pay only for the software that matters!
Take control of your SaaS expenses with Livlyt and experience streamlined optimization.
Visit our website to get started today and unlock a free demo!