Apr
28
to Nov 25

Cost of Goods Sold

According to Wikipedia, cost of goods sold “refers to the inventory costs of the goods a business has sold during a particular period.” COGS is different in different business (ie. software vs retail).

For businesses selling hard goods, we define COGS as the direct costs attributable directly to the production of the goods sold by a company. It includes the cost of the materials plus the direct labor costs used to produce the good. It excludes indirect expenses such as distribution costs and sales costs.

Due to the nature of software, there is no inventory but there are costs to deliver the application.Leverage agile frameworks to provide a robust synopsis for high level overviews. Iterative approaches to corporate strategy foster collaborative thinking to further the overall value proposition. Organically grow the holistic world view of disruptive innovation via workplace diversity and empowerment.

How to calculate COGS in SaaS

Sum of the following:

  • Hosting fees (our highest expense after salaries and benefits)

  • Third-party web fees like content delivery networks, embedded software, etc
  • Support personnel costs
  • Customer on-boarding costs (e.g. client implementation personnel costs)
  • Note: Credit card fees and other billing fees often are not cost of goods sold for SaaS companies and are instead general and administrative fees

How to calculate COGS in everything else

Sum the following:

  • Cost of materials
  • Direct labor costs used to produce the good
  • Indirect expenses such as distribution costs and sales costs

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Aug
29
4:30pm 4:30pm

Average Wallet Size

The total amount that a single customer can spend in a given period of time for a category of services (i.e. their budget). This metric is important because it gives a sense of the financial capabilities of your customers, and it allows an observer to judge how expensive your product is relative to a customer’s appetite. Startups that charge a small amount compared to the average wallet size are just as risky as those that charge a very high proportion of the wallet size as their product’s price. You don’t generally want to be insignificant, nor do you want to be so large that you knock out an entire budget. 


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Aug
29
4:30pm 4:30pm

Magic Number

A helpful metric brought about by Scale Venture Partners for calculating the sales and marketing efficiency of a SaaS company since Classic sales and marketing efficiency metrics are utterly misleading for SaaS companies. To calculate, take the change in subscription revenue between two quarters, annualize it (multiply by four), and divide the result by the sales and marketing spend for the earlier of the two quarters.

The general idea is that if the magic number is greater than one, more should be invested in sales and marketing. If the magic number is less than .7, additional energy should be invested in making customer acquisition more cost effective.


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Aug
29
4:30pm 4:30pm

Average Order Value

Tracks the average dollar amount spent each time a customer places an order. Average order value is a great metric for gauging how you're upselling or cross-selling. If this metric is going up over time, you're succeeding at either. If it's going down, might be time to start a few optimization experiments. 

How to calculate Average Order Value

Revenue / Units Sold = Average Order Value


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Aug
29
4:30pm 4:30pm

Revenue Churn

A SaaS metric that measures the rate at which monthly recurring revenue (MRR) goes away due to subscription cancellations. Revenue Churn rate = monthly revenue lost / MRR at the beginning of the month. It is typically expressed as a percentage.

How to calculate Revenue Churn

monthly revenue lost / mrr at the begging of month = Revenue Churn


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Aug
29
4:30pm 4:30pm

Customer Churn

The rate at which subscribers cancel their subscription to a recurring service. Successful companies require their growth rate to exceed their churn rate.  It's helpful to compare these two metrics to understand if you're on track for success. It is typically expressed as a percentage. Churn does not take into account new sales during that month. 

How to calculate Customer Churn

number of customers who canceled in the month / total number of customers at beginning of the month = Customer Churn


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Aug
29
4:30pm 4:30pm

Purchase Frequency

This calculation shows you the average number of times that a customer is making a purchase during your given time frame. It is calculated by taking the total orders during a period and dividing by the number of unique customers. This provides you with insight on how to structure your marketing to best suit the buying behavior of your audience. While knowing the number of purchases is useful, it is also important to use that number to calculate the time between purchases.

How to calculate Purchase Frequency

total orders / unique customers = Purchase Frequency


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Aug
29
4:30pm 4:30pm

Conversion Rate

The percentage of people who take a desired action. We calculate this on Malartu by dividing the total customers by the total current users to measure how many users convert to customers. We also calculate this in sales funnels to understand what percentage of leads convert to customers. There are many ways and places to calculate conversion rates. All are possible within Malartu using custom metrics.


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