I have been trying for the past several months to get a good answer to the key question of what is your cost of goods sold for a software as a service provider. Mike Gonnerman, a CFO to many Boston start-ups gave me some great advice to go and compare other SaaS public 10-K’s.

The best thing in this was analyzing companies 10-K’s sections called: “How We Generate Revenues.” – Amazingly straight forward way to see how companies sell, price and their costs.

The challenge is finding a pure example since many companies that sell SaaS offerings are also selling non-SaaS services. I chose three big SaaS companies to compare: Salesforce.com, Netsuite and Omniture. They seem to be the purest form of SaaS companies.

Salesforce.com’s COGS

• Hosting our service and providing service
• Data Center Capacity,
• Depreciation or operating lease expense associated with computer equipment,
• Website Development
• Allocated overhead and amortization expense with capitalized software related to application service and acquired technology
• Allocate overhead such as rent and occupancy charges based on head count
• Employee benefit costs and taxes are allocated based upon a percentage of total compensation.

+++++++++++++++++++++++
The cost of professional services is significantly higher as a percentage of revenue than for our enterprise cloud computing subscription service due to direct labor costs.
+++++++++++++++++++++++

Netsuite’s:

• Hosting the application
• Customer Support
• Data Communication expenses
• Personnel – Operations
• Professional Services and Training Personnel
• Stock based compensation
• Software license fees
• Website development
• Allocated overhead
• Amortized software and equipment to deliver service?

(Costs associated with providing professional services is significantly higher as a percentage of revenue than the costs associated with delivering our software services due to the labor costs associated w/pro services.)

++++++++++++
Overhead is allocated based on head count, per department
++++++++++++

Omniture

• Cost of subscriptions
• License and Maintenance revenues to operating our network
• Account management and technical support personnel
• Amortized intangible assets

Couple of interesting points from these Annual Reports:

Salesforce.com and Netsuite bill annual subscriptions either annually or quarterly. Netsuite actually states they do NOT sell more then a one-year subscription (they believe that is common practice in their business). Salesforce.com also shares that they bill annual or quarterly subscriptions. Omniture bills annually, quarterly and monthly and overages is monthly arrears.

If you are also trying to get a good Cost of Goods Sold, please share.

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