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Marketing Acquisition Cost for SaaS Co. - COGS or Direct Expense

We are a SaaS company looking to change the way it allocated certain Sales & Marketing costs.  Currently, all S&M costs are allocated to a direct expense line item.  I have done some research and it appears that maybe we should reconsider how we allocated some of the direct sales & marketing costs associated with customer acquistion to COGS.

I am wondering if any one else has gone through the process and what was their decision regarding this subject.

 

Reference URL: http://chaotic-flow.com/saas-business-model-on-the-cloud-the-customer-is-king/

Answers

Don Schlosser
Title: Chief Financial Officer
Company: Varolii Corporation
LinkedIn Profile
(Chief Financial Officer, Varolii Corporation) |

In several SaaS companies I've worked with I've never seen marketing or acquisition costs classified as COGS. I believe they should be classified as S&M costs.

Rohit Giri
Title: Financial Analyst
Company: Squarespace, Inc.
(Financial Analyst, Squarespace, Inc.) |

I work for a SaaS company, and did some research on the matter. Most if not all public SaaS companies classify DAC as an S&M cost. We have begun to conform with this practice. Good luck.

Damon Butler
Title: CFO
Company: The Protective Group, Inc.
(CFO, The Protective Group, Inc.) |

What is the logic behind changing? Is there a specific FASB you're using to get to this change? How would this improve the quality of the information in the financial statements?

Topic Expert
Edward Abbati
Title: Vice President of Finance
Company: Location Labs
LinkedIn Profile
(Vice President of Finance, Location Labs) |

The reason I am asking this question is because a company I am consulting for is doing this allocation. I realize that in does not conform to normal practices, but it got me thinking that maybe we are too locked in our ways of looking a financial statements. I found this article about CAC and it deepened my interest. In other words, with the new amounts of information we are getting today and the different analysis that we are doing, should we reconsider how we allocate certain costs....

David Liu
Title: Treasury Analyst
Company: Russell Investment
(Treasury Analyst, Russell Investment) |

I have to agree with Damon Butler. If there isn't a FASB warrants the change, the reclass would be close to creative accounting. I do believe one of the FASB statement did dictate the classification as direct sales & marketing cost. It seems a bit stretched if it's classified as COGS. That's like saying the customers are responsible for the expension of the company when the decision lies in the company operator and owners.

Topic Expert
Donald Koscheka
Title: Principal
Company: Bluecloud Communications
(Principal, Bluecloud Communications) |

We are a startup offering SaaS services to our clients. We allocate ALL marketing costs to sales and marketing. The link that Edward posted has a flaw in its logic - even software companies have client acquisitions costs.

That said, we DO track profitability by deal: we want to know what it costs to acquire a new customer - but this is an internal scorecard metric, not an accounting standard.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Donald raises a good point, one which is becoming more and more blurry as we get more sophisticated in our use of our accounting data.

We forget we have at least three (3) sets of accounting data; financial, tax and managerial. We also have three sets of rules for the accumulation and reporting of such data.

Many times the rules are not quite in sync with each set and this ends up causing the dilemma of "how do we book the transaction".

The answer is tied to a) your business, b) your accounting system, c) your auditors and d) regulatory and contractual lending requirements.

In the final analysis, you need to pick one set of books and ultimately make adjustments to/for the others.

CV Sudarshan
Title: Sr. Executive
Company: Gorilla Expense
(Sr. Executive, Gorilla Expense) |

We usually have multiple sales and marketing costs that get rolled into one S&M line item. We have never associated S&M costs to COGS. I am not aware of any benefits of doing so.

The crucial question is - since S&M costs are typically dynamic, will you get a true picture of COGS if you roll S&M costs into it?

Then again, as an internal metric and if you can see the benefit, it would make sense to do it this way.

Ben Murray
Title: Vice President and CFO
Company: Cartegraph
(Vice President and CFO, Cartegraph) |

S&M should stay S&M and then you should calculate your Customer Acquisition Costs (CAC) as part of your SaaS metrics reporting package. A very important number.

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