What’s the right level of COGS spend for SaaS businesses? This spend encompasses not only your data and hosting costs, but also customer success. We hear investors and investment bankers say don’t let the figure exceed 20% of revenue, but that may not be right. Below are COGS as a percent of revenue in 2024 and 2023 for SaaS companies that have gone public since October 2017 (72 companies) and are still public (60 in 2024 and 62 in 2023). Observations follow:
COGS overall is ~26% on median. For the past three years, the figure has been very stable, hovering at 26% when we look at the dataset as a whole.
Profitable companies are more efficient. For profitable companies, COGS as a percent of revenue is consistently ~21%.
Unprofitable companies spend much more. Interestingly, unprofitable companies spend much more on COGS than profitable ones, with COGS as a percent of revenue coming at ~27%. That figure has grinded lower each year since 2022 when it was 29%. We don’t have a good understanding why unprofitable companies would spend more on COGS than profitable ones.
Overall, we’d say the standard rule of thumb that COGS should be 20% of revenue isn’t right. We’d advise staying between 20% and 25%. If you’re on the high end of that, it will be forgiven so long as you have good growth, retention, and cash efficiency.
Thank you for your readership. See more blogs and SaaS data at blossomstreetventures.com. Email the author at sammy@blossomstreetventures.com.
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