Second, professional services are a topic of guidance under ASC 606 and ASC 340. Also, a SaaS business should absolutely know if it is making or losing money on professional services, and it should be doing so intentionally. Without knowing the gross margin on pure SaaS license revenue, things like CAC Ratio cannot be accurately computed. Implementation is a different business than the ongoing provision of a SaaS product, and mixing those line items obscures the core economics of both. About Professional ServicesĪbout those professional services… If your company has more than a negligible amount of revenue from implementation or services, it is a good idea to report those costs and revenues separately. Management can then decide how to invest that contribution margin back into sales, marketing, and product development on a discretionary basis. The above definition is most consistent with what we see day-to-day and provides management with a solid view of the company’s contribution margin. (This generally means calculating overall employee overhead like taxes and healthcare as a percentage of salary numbers, and then increasing allocated departmental salary lines by that fixed percentage.) If your accounting practices make it practicable, use a “fully burdened” allocation of the employee costs that you put into COGS. All other R&D expenses should not be in COGS. The salaries of the team responsible for keeping the production instance of the software up and running should also be included in COGS. (See below for more about the distinction between customer success and account management.) Any appreciable portion of the CS team’s effort that is spent on upselling and cross-selling should be in its own operating expense line of included in sales. Since the vast majority of SaaS companies today use “cloud” or other off-site hosting, the need to include depreciation in COGS is a practice we rarely encounter.Ĭustomer (or technical) support and customer success should include the salary and other direct costs of the team that is primarily focused on retention and satisfaction. Hosting costs should also include all core communication costs, and in the rare instance in which a company owns and maintains the servers used to deliver its product, depreciation on those owned assets. Generally speaking, if these expenses were not paid, the provisioning of the product and service to the installed base of customers would stop or deteriorate quickly. These are all direct and primarily variable costs required to deliver the SaaS application.
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