What Counts as COGS for SaaS?
COGS (Cost of Goods Sold) for SaaS includes only costs directly tied to delivering the product: cloud infrastructure (AWS, GCP, Azure), payment processing fees, third-party APIs, and dedicated customer support costs (support agent salaries, helpdesk tools).
COGS does not include sales, marketing, R&D, or general & administrative costs — those are operating expenses. Misclassifying opex as COGS artificially suppresses gross margin and misleads investors.
Why Gross Margin Matters for Valuation
SaaS companies with 75–80% gross margins trade at significantly higher ARR multiples than those with 50–60% margins. Higher gross margin means more of each revenue dollar flows to the bottom line, making future earnings more valuable. A 10-percentage-point gross margin improvement can increase valuation by 30–50% at the same ARR.
How to Improve SaaS Gross Margin
Infrastructure optimisation is typically the highest-leverage lever: right-sizing cloud resources, using reserved instances, and reducing egress costs can cut COGS 20–40% without touching the product.
Payment processing optimisation (renegotiating rates with Stripe/Braintree, or using ACH for enterprise customers) can recover 0.5–1.5% of revenue in COGS. Third-party API costs (AI models, mapping, SMS) often scale faster than revenue — audit and cache aggressively.
75–80%
Target gross margin for pure SaaS
70%
Minimum expected at Series A
90%+
Gross margin of best-in-class AI SaaS
30–50%
Gross margin improvement from COGS optimisation