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Hey {{first_name}} 👋, hope you had a great week! In the last issue, we discussed why tracking Cash Runway matters, and now we are moving with the next topic from Financial Metrics content.

Let’s talk about ⬇️

Most SaaS founders know their revenue number cold.

Ask them their MRR, ARR, or last month's bookings — they'll answer without blinking.

But ask them what it actually costs to deliver that revenue? Silence. Or worse, a number that's missing half the expenses that belong there.

That gap — between what you think you're spending to serve customers and what you're actually spending — is one of the most common and costly blind spots in early-stage SaaS finance.

And it all comes down to one metric: cost of revenue.

Today I want to break down exactly what belongs in it, why most founders get it wrong, and what the number is actually telling you about your business.

Let's dig in:

1️⃣ What Cost of Revenue Actually Means

2️⃣ Cost of Revenue vs. COGS — What's the Difference?

3️⃣ Why It Matters for Gross Margin

4️⃣ How to Analyze Cost of Revenue Over Time

The goal here is to capture every dollar it takes to deliver your product to a paying customer.

For SaaS companies, cost of revenue typically includes:

Notice what's on that list: people. Specifically, your customer success and support teams.

This is where a lot of founders go wrong. They treat customer support as an operating expense — something that sits below the gross profit line. But in SaaS, support isn't overhead. It's a direct input into service delivery. It belongs in cost of revenue.

The same logic applies to your customer success team. They drive retention, expansion, and upsells. If your product doesn't work without them — and most SaaS products don't — their cost belongs above the line.

The goal here is to use the right metric for the right conversation.

In traditional product businesses, COGS is clean: raw materials plus direct labor plus production overhead. Subtract it from revenue and you get gross profit.

For SaaS, COGS and cost of revenue are often used interchangeably — but they're not technically the same thing. Cost of revenue is broader. It includes COGS plus the additional costs tied to securing and supporting a sale, such as distribution and certain marketing expenses.

The traditional COGS formula — starting inventory plus purchases minus ending inventory — doesn't apply to SaaS at all. There's no inventory. Instead, SaaS COGS is simply the sum of all direct costs required to deliver the service.

That sum will look different for every company. Slack's cost of revenue includes hosting fees, personnel costs, and payment processing. A different SaaS company might weight those categories completely differently. There's no universal formula — just a consistent principle: if it's required to deliver and support the product, it belongs in cost of revenue.

I'm Aleksandar, fractional CFO at Fiscallion, where we help founders like you achieve financial clarity, streamline reporting, and build investor-ready forecasts.

Ready to level up your finances?

The goal here is to understand what your cost of revenue is actually signaling about your business health.

Cost of revenue is the direct input into gross profit and gross margin — two of the most important metrics for evaluating SaaS performance, especially in the context of frameworks like the Rule of 40.

Here's the dynamic that catches founders off guard: cost of revenue doesn't always move in line with revenue. Sometimes it scales faster. And when it does, your gross margin compresses — even if ARR is growing.

Slack is a good real-world example. In a single quarter, their cost of revenue rose significantly faster than their revenue growth — driven by higher third-party hosting fees, headcount increases, and rising payment processing costs. Revenue grew 36%. Cost of revenue grew 53%. The result was gross margin compression, even as the business was scaling.

That's the dynamic to watch. If your cost of revenue is growing because you're adding customers and delivering more service, that's expected and healthy. But if it's growing without a proportional return in revenue or retention, something in the cost structure needs a closer look.

The goal here is to turn a static number into a trend that drives decisions.

A single month's cost of revenue tells you very little. The trend over time tells you everything.

Specifically, you want to track:

When you break cost of revenue into its components and track them over time, patterns emerge quickly. Maybe hosting costs are scaling linearly with usage — that's expected. Maybe support headcount is growing faster than your customer base — that's a signal to investigate.

This kind of visibility is exactly what separates founders who manage margins proactively from those who discover a problem six months after it started.

Cost of revenue isn't just an accounting line item. It's one of the clearest windows into whether your business is becoming more or less efficient as it scales.

When cost of revenue grows slower than revenue, margins expand. When it grows faster, margins compress. And in SaaS — where gross margin is a key input into valuation, fundraising conversations, and the Rule of 40 — that gap matters enormously.

The founders who understand this metric deeply, track it consistently, and know what's inside the number are the ones who can walk into a board meeting and explain margin movement with confidence.

The ones who don't are the ones who get caught off guard when an investor asks why gross margin dropped three points last quarter.

Make sure you're in the first group.

Hit reply and let me know: what's the biggest line item inside your cost of revenue right now — and is it trending in the right direction? I read every response.

Chat soon,

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