What is Cost of Revenue?
Nexa Consultancy | Startup & Finance Glossary
Cost of Revenue, often used interchangeably with Cost of Goods Sold (COGS), represents the direct costs associated with generating a company's revenue. However, for service and software companies, it can be a broader term.
For Startups: Understanding Cost of Revenue is essential for calculating Gross Profit and Gross Margin, which are key indicators of a startup's core profitability and efficiency.
For SaaS: In a SaaS context, Cost of Revenue typically includes expenses like hosting fees (e.g., AWS costs), third-party software licenses embedded in the product, and the salaries of the customer support and implementation teams. R&D costs are usually considered an Operating Expense, not part of Cost of Revenue.
Calculation: Gross Profit = Revenue - Cost of Revenue
Example: A SaaS company has ₹1 Crore in revenue. Its hosting costs are ₹10 Lakhs and customer support salaries are ₹5 Lakhs. Its Cost of Revenue is ₹15 Lakhs, and its Gross Profit is ₹85 Lakhs.