To maximize profits and stay competitive, it’s essential to consider your cost of sales–the SaaS sector requires accounting just like any consumer sector. Unfortunately, traditional cost of goods sold (COGS) formulas don’t substitute as cleanly into SaaS sales calculations as they do with the physical marketplace.
So, let’s focus on SaaS cost of sales. More specifically, what is it and what makes it so different? This article will also help you pinpoint SaaS expenses and provide SaaS sales tips to reach your full selling potential.
What Is SaaS Cost of Sales?
Before we get into the nitty-gritty, it’s important to understand what SaaS and cost of sales mean.
SaaS is the term for software as a service and refers to the hosting, sale, and management of software.
Cost of sales (COS), also known as cost of goods sold (COGS), is the cost associated with producing the goods sold.
Companies need to know the COS to determine competitive prices for SaaS while maintaining a healthy profit margin.
What Makes SaaS COS Different?
SaaS COS is different from traditional physical product sales. SaaS products are sold as a subscription service and are long-term products. There is no physical product, so production doesn’t include raw materials in the traditional sense.
SaaS definitions can also be tricky to pin down because software as a service encompasses a wide range of software sales options. There are many stages to the SaaS sales cycle, which bring with them expenses that otherwise wouldn’t be part of the COS in non-SaaS sectors.
This leaves some leeway in what can be considered part of the COS.
To manage stakeholder expectations and to create accurate accounting formulas, your company needs to have clear guidelines on what is part of the SaaS COS.
SaaS Cost of Sales
To determine the cost of sales for SaaS, consider the variables that lead to the software you are selling. Hosting, employee costs, technical support, third-party software, and hardware–these are all costs that are necessary to deliver the end product software to customers.
If you are unsure whether a SaaS expense should be considered a COS, consider the following:
Would the software work and be customer-ready without the expense? If yes, then the expense does not qualify as a COS. If the expense is necessary, then it is considered part of the COS.
SaaS COS Expenses Breakdown
Let’s consider some common SaaS COS expenses.
COS should include all hosting service fees, like AWS (Amazon Web Services). If the company owns its physical servers, you’ll still need to add the hosting costs as a depreciating cost.
Internal Engineering or Dev Ops Team
The internal engineering or Dev Ops team is responsible for the technical upkeep of your software. They’ll take care of upgrades and manage the hosting infrastructure and should be billed as a recurring COS expense.
Don’t include the internal engineering team that built the software. That team and all associated expenses are part of the operation expenditure budget.
SaaS customer support is highly technical. A dedicated technical customer support team with the necessary technical know-how is a must. The maintenance, training, employee fees, and third-party software costs of these teams are also part of COS.
Also includes the customer success team, which is responsible for training and onboarding new customers to the software. If you are selling self-service software with no onboarding, this isn’t a necessary expense.
Third-party software used to run or manage the software, which are primary resources that make it possible to sell your SaaS, should be added to the COS. If they are not essential, they are not to be added to the COS.
Other Creation Costs
SaaS covers a wide variety of software options. If you have costs associated with your service that are recurring and necessary to sell your software, consider it part of the COS.
Top SaaS Sales Tips
SaaS relies on a monthly subscription, with sales models that prioritize higher customer lifetime value. The sales team needs to clearly and convincingly showcase the benefits of your SaaS and its long-term uses. These SaaS sales tips will help.
Lure With Trial Periods
Trial periods are very effective at getting people to hit the buy button. They’re especially effective in the SaaS sector. However, it’s important to be strategic with the free trial offer.
The higher the software learning curve, the longer the trial period should be. For software with a challenging onboarding process, a 30-day free trial can be very beneficial. For simple self-service software, a shorter period of 7 to 14 days is more appropriate.
Once you have access to your customers, keep communication channels open and busy. While spamming your customer won’t win any points, persistent marketing with software offers or valuable information can be a great long-term incentive for customers–especially during the trial period.
Sway with Annual Subscriptions
Annual subscriptions are an effective way to improve customer retention and increase advance fees. Offer an annual subscription that works out to a lower monthly cost. Make sure it’s only payable in one go.
Use Engaging Product Demos
Product demos are a powerful way to showcase your software’s capabilities. Instead of just listing the product features, create captivating pre-sales demos with sales demo options like Saleo and let consumers get a feel for the software.
Data is an invaluable resource. Gather feedback and track the software churn rate. Survey lost customers to pinpoint what led to them canceling their software subscriptions.
Use the churn rate and other feedback to fix software bugs, improve features, and streamline the SaaS sales process. If customer grievances are left unchecked, the company is at risk.
SaaS, like any marketplace, has its production costs. The COS expenses can look very different from those of traditional, physical products.
To effectively run your SaaS, offer fair but competitive prices, and maximize profits, consider the above points to determine your COS and its associated costs. Implement our SaaS sales tips to increase the customer lifetime value of your company.
And finally, maximize software sales with engaging product demos from Saleo. Saleo lets you create interactive software demos that showcase your software capabilities to clients in real time. Request a demo today!