SaaS Cost of Goods (COGS) is the fulcrum on which gross margin and key SaaS metrics balance. SaaS finance managers must think strategically as they define exactly how to calculate COGS.
More expense in the SaaS COGS bucket brings down gross margin but might improve Customer Acquisition Cost (CAC) — which can have longer-term implications. Conversely, putting credit card processing, freemium hosting, and even Customer Success into operating expense lowers operating profit but raises gross margin.
At the highest level, SaaS COGS should include all direct costs for producing and delivering the product you sell. In the tech world, however, the difference between product support and innovation can be a fine line. Expense categories like hosting, salaries, and customer success require a nuanced approach when deciding whether to include all or an allocated portion in COGS.
SaaS FP&A leadership must get beyond high-level GAAP guidance and adopt a clear decision framework for COGS. Experienced finance managers recommend being as consistent as possible through different growth stages and keeping the approach simple enough to manage.
In our first monthly webinar, SaaS Conversations with Lauren Kelley, we delved into what goes into COGS and the implications for those decisions. Brian Beaupre, Head of Finance at Cisco Cloud Security, joined Lauren — the discussion follows.
SaaS Conversations with Lauren Kelley
COGS: What’s In / What’s Out
Lauren Kelley:
Hello, everybody. We are live now with our webinar series SaaS Conversations: COGS — What’s In and What’s Out. We’re going to give it another minute or two for folks to join, but thanks to everyone for being here. Brian and I are in two different places in the Boston area, and we got hit with a fair amount of snow last night. Brian, I can see some of your snow behind you.
Brian Beaupre:
I don’t know if you can see all of it, but it’s a good 15–16 inches out there.
Lauren Kelley:
We only got about 12 inches, but it was very wet and hard to shovel this morning. My husband conveniently had a hernia operation last week, so he couldn’t do any shoveling.
Brian Beaupre:
Lucky you.
Lauren Kelley:
Yes. So, as long as we’re here, let’s get started. A little housekeeping: all participant phones should be on mute. If you’re having trouble, dialing in on a landline usually works better than the computer. If you have questions about today’s topic, please send them through chat. We’ll answer as many as we can during the broadcast and have a Q&A at the end. If you want to continue the conversation after this webinar, please visit our website and the SaaS Q&A section.
Let me introduce Brian, our speaker today. Brian is Head of Finance at Cisco Cloud Security. He joined Cisco through the acquisition of CloudLock, where he was Director of Finance. He’s an active participant in the OPEX benchmarking community and sits on the board and steering committee of the CFO Leadership Council. Brian brings deep finance experience from senior roles at tech companies including Agyro, Ipswitch, and NetSuite.
For those who don’t know me, I’m the CEO and founder of OPEXEngine. OPEXEngine is a SaaS benchmarking platform and community — a give-to-get paid subscription for SaaS finance professionals. We’re an independent community of primarily B2B SaaS companies and have been benchmarking companies with revenues from about $1 million to $500 million for over 10 years.
Defining COGS in SaaS
Lauren Kelley:
At the highest level, what’s the definition of COGS?
Brian Beaupre:
COGS is subjective and tethered to your business model. If I had to distill it into one sentence, it’s the expenses required to deliver the baseline functionality you promised the customer during acquisition.
The subjectivity comes from defining what your standard offering includes. Is there elevated consulting? Is support limited to tech support? How do devops fit in? The most important thing is consistency — evaluating trends within a consistent framework rather than constantly shifting classifications.
Lauren Kelley:
Typical SaaS COGS categories include hosting, third-party licenses, and salaries for people involved in delivery — customer support, services, and sometimes customer success. One of the biggest questions we get is whether customer success belongs in COGS or not.
Hosting, Salaries, and Allocation Decisions
Brian Beaupre:
Hosting historically sat entirely in COGS. Today, with cloud providers like AWS, it’s important to inspect your footprint. Some hosting supports pre-sales motions or trials, which may belong in operating expense. Partnering closely with ops to tag and allocate costs consistently is critical.
With salaries, there’s nuance. Do you include only help desk and bug fixes? Or all baseline tech support? Do you allocate management or overhead? These are subjective decisions, but materiality and consistency should guide you.
Strategic Implications of COGS
Lauren Kelley:
We ran a poll during the session and found that many companies either allocate hosting between COGS and opex or put all hosting in COGS.
Brian Beaupre:
Gross margin is not just a scorecard metric — it’s meant to fund innovation, growth, and competitive advantage. SaaS metrics, including gross margin, should be treated as leading indicators that inform where to accelerate or throttle investment.
Credit Card Fees, Billing, and Taxes
Lauren Kelley:
We’ve seen a shift in where credit card processing fees sit. Historically, they were in opex; today, many companies put them in COGS because they’re a direct cost of delivering the service. Ultimately, it’s a strategic decision that should be aligned with your auditors.
Brian Beaupre:
My experience has been that credit card fees were in COGS across several organizations, though reasonable arguments can be made either way.
On billing and sales tax remittance, my experience is that they typically do not sit in COGS, though they are clearly part of the end-to-end customer experience.
DevOps, Freemium, and Onboarding
Lauren Kelley:
Freemium hosting is often a lead-generation and pre-sales strategy, so many companies treat it as sales and marketing rather than COGS.
Brian Beaupre:
I agree. If you can carve it out cleanly, it belongs in CAC. DevOps, in my experience, usually sits in COGS because the primary role is keeping the lights on and meeting SLAs, even though there’s often some overlap with development.
Onboarding has typically not been part of COGS in my experience, especially when much of the work happens during pre-sales or is treated as a professional service.
Software Capitalization
Lauren Kelley:
We’ve seen wide variation in software capitalization practices. Some companies capitalize nothing; others capitalize a significant percentage.
Brian Beaupre:
If you’re hosting your own code and the work creates a future revenue-generating asset, there’s a strong argument for capitalization, with amortization flowing through COGS rather than opex. Key factors include ownership of the code, hosting model, and revenue expectations.
Customer Success: In or Out?
Poll results showed customer success split roughly 50/50 between COGS and operating expense.
Brian Beaupre:
It depends on the role. If customer success is compensated on renewals and expansion, it behaves more like sales and marketing. If it’s focused on baseline product adoption and retention without revenue quotas, it can justify being in COGS. Organizational structure matters.
Product Maintenance vs. New Development
Lauren Kelley:
Should engineering time be split between R&D and COGS if teams maintain existing products while building new features?
Brian Beaupre:
Yes, if you can track it cleanly. If not, keep it simple but run sensitivity analysis. Document your methodology and apply it consistently. The goal isn’t to engineer numbers, but to understand scalability and resource allocation.
Closing Thoughts
Lauren Kelley:
Thanks, Brian, and thanks to everyone who joined us today. The slide deck and recording will be available to all registrants. We encourage you to continue the discussion in the SaaS Q&A at www.opexengine.com.
COGS definitions for SaaS companies continue to evolve, and shared experience is one of the best ways to navigate these decisions.
