COGS for Virtual Products and SaaS

Cost of goods sold (COGS) refers to the direct costs attributed to the production and sale of a product or service. COGS differs from operating expenses (OpEx), like marketing and administrative costs, in that OpEx includes expenditures that are not directly tied to the delivery of the product or service. COGS is an important metric because it is subtracted from total revenue to determine your gross profit.

For the sale of virtual products, services, and subscriptions, this is often referred to the "cost of sales", particularly when there are no raw materials or inventory involved in their delivery. COGS related to production and inventory of physical goods is handled in the COGS Assumptions for Inventory/Manufacturing section.

For costs of sales most applicable to transaction- and subscription-style revenue models, the tool includes a list of potential cost categories like hosting, technology, licensing, applications, and subscriptions. This is by no means an exhaustive list and if you would like to see other direct costs listed in this section, please contact me. Note that transaction costs related to credit card fees are handled in a different section and you will have the option to classify them as OpEx or COGS depending on your situation.

For each cost category, include a monthly average cost and (optionally) a month-over-month growth rate for years 1-5. The last two rows in the Transaction & Subscription Cost of Sales Assumptions table are per support rep meaning that any monthly cost entered in those rows will multiply by the number of COGS-classified hires included in the hiring plan for a give year. I'm calling them "support rep" here because customer service is typically classified as a cost of sales.

The "Transaction-Only Cost of Sales Assumptions" section is where you can input direct costs that attend each transaction. For example, if you sell a custom digital product for $100 on a one-time basis and the customization for each sale requires $20 of labor, the cost of sales per transaction is $20. Input the cost of sales for each active tier in this section.

For subscription revenue models, you can enter the monthly cost that attends each month of service given to each subscriber. For SaaS, this could, for example, be a monthly cost per account to ensure retention and customer satisfaction.

The model calculates your margin on each transaction or subscription immediately below the input fields in this section. Note that this result only factors in the Cost of Sales or Monthly COGS you just entered and does not represent your total gross margin, which is calculated based on additional assumptions like customer service hiring and credit card fees.

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If you also have a business model involving the sale of physical goods, continue to the COGS for Physical Goods section. Otherwise you can set up your Cash Management Assumptions. Or head back to the Guidance page.