SaaS companies don't manufacture physical goods, so "Cost of Goods Sold" can feel like the wrong term entirely — most SaaS income statements use Cost of Revenue instead, covering the direct costs of delivering the software to customers.
What belongs in SaaS Cost of Revenue
- Hosting and infrastructure: cloud compute, storage, bandwidth directly tied to running the product for customers
- Third-party APIs and licensed data: any per-use or per-seat cost passed through from a vendor your product depends on
- Customer support: support and success staff, when their role is delivering the product rather than selling it
- Payment processing fees: Stripe/PayPal fees on subscription charges
- Implementation/onboarding staff: for products with hands-on setup, the direct delivery cost of getting a customer live
What does NOT belong in Cost of Revenue
- Sales and marketing salaries and spend
- R&D and product development (new feature work, not running existing features)
- G&A — finance, HR, legal, executive salaries
- Sales commissions
A common mistake is putting all engineering cost into Cost of Revenue. Only the portion directly tied to running the live product for existing customers belongs there — new feature development is R&D, an operating expense below the gross margin line.
Why the SaaS gross margin benchmark is so high
Because Cost of Revenue for software is mostly hosting and support — a small fraction of revenue at scale — SaaS gross margins of 70–85% are normal, versus 20–50% for businesses with physical COGS. This is the mechanical reason SaaS valuation multiples are typically higher than product businesses: more of every new dollar of revenue flows to gross profit.
Frequently asked questions
Does customer success count as Cost of Revenue or Sales & Marketing? It depends on the role. Success staff focused on renewal/expansion selling are often classified with Sales & Marketing; those focused on onboarding and support are Cost of Revenue. Some companies split a single CSM role's cost proportionally.
How should AI/inference costs be classified for AI products? As Cost of Revenue — inference cost scales directly with usage, the same way hosting costs do, and is a direct cost of delivering the product per customer interaction.
Use the COGS Calculator to compute gross profit and margin once you've correctly classified your Cost of Revenue components.