How to Slash COGS % and Unlock Growth in Your SaaS Startup (Benchmarks + Fixes)

gandhinath0
May 4
4 min read

Every dollar your startup earns has an inherent cost structure which comprises of COGS, and other operating costs.

SaaS startups that truly evolve don't just manage COGS (Cost of Goods Sold) as a percentage of revenue - they understand its role in their larger growth story. They see how this foundational metric either preserves or constrains their ability to create lasting value.

Understanding and optimizing COGS % doesn't just improve your numbers - it transforms your SaaS firm's entire operational framework.

Calculator, a few cents on a table and carpel measuring the cost of goods sold. — Image by Steve Buissinne from Pixabay

What COGS % Really Means for Your Startup

Cost of Goods Sold (COGS) as a % of Revenue shows exactly how much of every dollar you earn gets consumed by direct costs.

Definition:

Cost of Goods Sold (COGS) as a Percentage Of Revenue is a financial ratio that measures what proportion of a company's revenue is consumed by direct costs required to produce the goods or services sold. 

COGS is the sum of all direct costs associated with producing the goods or services sold in the period.

Total Revenue: Use the net revenue figure, which is gross sales - returns, discounts and allowances.

Formula:

COGS as % Revenue = [ Cost of Goods Sold ÷ Total Revenue ] X 100

Example Calculation

COGS for the period =- $1,600.00
Total Revenue for the period = $5,000.00

COGS as % Revenue = [ 1600 ÷ 5000 ] X 100 = 32%

This means 32% of your company's revenue was spent on direct costs to produce the goods or services sold.

A real industry example - Let's take the numbers within the context of discussion for Peloton for the Fiscal Year ending June 30, 2024,

COGS for the period =- $1.49B
Total Revenue for the period = 2.70B

COGS as % Revenue = [ 1.49 ÷ 2.7 ] X 100 = 55.2%

So, in FY2024, Peloton’s COGS as a percentage of revenue was approximately 55%. Note that Peloton’s hardware costs skew this example. However, healthy SaaS startups with less complex products, typically have lower COGS - See the benchmarks section below.

💡My experience serving as caution -

Let me share a breakthrough moment that reshaped my understanding. We faced a significant challenge with our COGS optimization strategy. We went all-in on Kubernetes infrastructure to reduce COGS. The costs dropped, but we created unexpected problems. Our infrastructure team got laser-focused on optimization that significantly slowed down the entire development process. Features that should have taken days stretched into weeks.

Lesson: Sometimes chasing lower COGS can cost you something more valuable: cost of your startup’s agility and momentum.

Why It Matters

Direct impact on gross margin: Lower COGS % = higher gross margin = more resources for growth and innovation. Aim for 70–80% gross margins in B2C (vs. 80–90% in B2B).
Investor signal: Every point matters for valuation (COG%) when SaaS VCs get involved
Scalability: COGS % that stays flat or drops as you grow means you’re scaling efficiently.
Survivability: High COGS % can turn your startup into a "zombie", burning cash with little to reinvest.

Lower COGS means leaner, faster, stronger potential for growth, innovation and scaling.

Costly Mistakes That Kill Your Margins & Fixes

Misclassifying Expenses: Think Itemizing COGS vs Other Costs.Getting all expenses mixed up skews metrics and hence, decisions based on data.Keep direct costs in COGS, nothing else. Sales, marketing, and admin costs are separate.
Incorrect Revenue Figures:Think Net vs Gross Revenue. Use net revenue - what's left after returns, allowances and discounts. That's your real money. Gross revenue makes your margins look better than they are in reality.
Period mismatch: Think in terms of always matching COGS and appropriate revenue periods. Failing to do so is a ostly error that can lead to misleading metrics and misguided decisions.

Monthly COGS & MRR → Analyze Monthly

Yearly COGS & ARR → Analyze Yearly

Poor Inventory Management: Think about closely watching your inventory and cloud resources carefully. Inaccurate tracking can distort COGS and profitability.

Less than Optimal tracking = Erroneous Metrics = Misguided decisions

Not tracking COGS weekly/monthly: Real-time dashboards catch problems and practical sense, small problems are less expensive to fix than complex ones.

Benchmarks: COGS Targets by Growth Stage

Growth Stage	B2B SaaS COGS %Target	B2C & B2B2C SaaS COGS %Target	Danger Zone	Consequences If Exceeded
Validation Seekers ($1M-$2M ARR)	25–35%	35–45%	>50%	Burn rate spikes Seed round risks
Traction Builders ($2M-$4M ARR)	18-25%	25-35%	>40%	Lower Series A valuations (2–3x multiple hit). Source SaaS Capital, 2024.
Scale Preparers ($4M-$7M ARR)	15-25%	20-30%	>35%	Growth capital constraints NRR erosion
Growth Accelerators ($7M-$10M ARR)	10-20%	15-25%	>30%	IPO readiness risks Acquisition discount

Gross margin <60% for B2B, <50% for B2C = urgent need to optimize.

Make the Metrics Better: Five High-Impact Moves

Automate Support: Cut support costs 30-50% with AI and community forums
> B2C startups often face higher support costs (15%+ of revenue) and infrastructure scaling hurdles
Optimize Infrastructure: If cloud spend >10% of revenue, act fast
Smart Pricing: Make revenue outpace COGS with usage-based pricing
Audit Vendors Quarterly: Consolidate and negotiate 15-25% savings
Watch COGS Granularly & Fix Fast: Know which products or customers drive your margins

Key Takeaways

COGS % Revenue is foundational in creating space for sustainable evolution of your startup
It acts as your early warning system and guide to understand true operational efficiency working its best alongside other financial metrics
Track it monthly and yearly; always match periods
Automate, optimize, and price smartly to boost margins
Higher margins = stronger valuations and faster growth