Exploring SaaS Average Cost of Service in 2023
The Average Cost of Service (ACS) metric isn’t as well known or as commonly understood as other SaaS metrics, such as the Rule of 40 or the SaaS Magic Number; however, it’s a critical measure to help determine how much it costs a SaaS business to support their existing customer base. If the Average Revenue Per Account (ARPA) and ACS per account are moving closer to each other, it’s clear a SaaS business needs to revisit its subscription pricing structure and, or its cost of supporting existing customers.
In this blog post, we’ll explore the ACS metric, how to calculate it, and what information it provides SaaS businesses.
Key Components of SaaS ACS
For a successful SaaS business model, it is essential to understand the various components that make up its Average Cost of Service (ACS). These commonly include hosting costs, customer support and customer success, software development, and account management. Knowing these elements helps businesses accurately forecast their cost of service in order to devise an effective pricing strategy or optimize existing unit economics within their operations.
Hosting Costs
Hosting services are a fundamental requirement for any SaaS business and product and are typically included in the cost of goods sold (COGS). Hosting fees often depend on the type of hosting requirements and plans. This may include shared or dedicated hosting or virtual private server systems.
While hosting costs often have variable and fixed cost components, SaaS businesses will see economies of scale as their subscriptions increase, resulting in a reduction in hosting costs associated with each account.
Customer Support and Customer Success
Customer support and customer success are terms commonly used interchangeably, but they are different in a few noteworthy ways. Historically, customer support included traditional support services such as technical assistance, answering customer questions, and ultimately helping existing customers get the services and product experience they paid for.
The term “customer success” now tends to cover more than just traditional areas such as the customer service activities noted above. It also includes other related activities and associated costs intending to create an environment where new and existing clients receive more value, and are more engaged, with the goal of generating more revenue from each account.
The overall idea of customer success is that the SaaS business is more invested and engaged in ensuring SaaS subscribers are successful and satisfied with the product. The result of this added focus and attention is that customer retention is increased, a greater likelihood of additional revenue generated from upsells and cross-sells, and lower customer acquisition costs (CAC).
Software Development and Maintenance
When considering development costs when calculating SaaS ACS, it’s important to focus only on the costs needed to maintain the software platform and not on costs associated with the overall development of the platform. In other words, you wouldn’t include software development costs that are planned to be capitalized when calculating ACS per account. It can get confusing and nuanced as to what percentage of the costs associated with software development personnel or other related costs should be used when calculating ACS. However, something as simple as using average hours spent on platform maintenance activities as a percentage of total hours will give a reasonable percentage for determining associated salaries and payroll expenses.
Account Management
Account management provides customers with service and assistance to maximize their use and satisfaction with the SaaS product. It’s clear there is an overlap between account management and customer success, and each SaaS business will include the related costs under either of the headings. Traditional examples of account management costs include support services and discounts, as well as providing coaching and educational opportunities.
Calculating SaaS Average Cost of Service
When calculating the SaaS ACS, you would add all the costs incurred related to supporting current customers for a specific period, such as a month or year, and dividing the total sum by the number of accounts. However, the total ACS can be broken into two Income Statement components – COGS and Operating Expenses (OpEx).
To calculate the COGS ACS per account, all costs incurred providing customer support, customer success, and software maintenance are totaled and divided by the number of accounts for the period. With this information in hand, the gross profit earned from existing customers is clear.
OpEx ACS per account is more nuanced and challenging to determine. It may include standard operating expenses found on an Income Statement, such as Sales and Marketing and General and Administrative (G&A) expenses. As only costs attributed to existing customers can be used to calculate ACS per account, a reasonable basis will need to be determined to allocate associated costs to both existing and those incurred to attract new customers. If the Sales and Marketing team determines they spend 12% of their time on activities supporting existing customers, this would be a reasonable percentage to use to determine the costs to use in the OpEx ACS.
Monitoring SaaS ACS and Making Adjustments
Monitoring the Average Cost of Service (ACS) per account is important to help ensure a SaaS business’s pricing and cost structure are optimized and that the business model is both sustainable and scalable. Keeping tabs on this cost over time makes it possible to recognize any changing patterns or trends and make adjustments where necessary.
Tactics for modifying a SaaS ACS include reducing hosting costs, making customer support and customer success activities more efficient, and simplifying software maintenance activities.
Summary
The SaaS average cost of service (ACS) isn’t as well known as other SaaS financial accounting metrics; however, it provides SaaS companies with valuable information on the cost of providing services to their customers. With this information in hand, SaaS founders can see any trends that need to be addressed and determine whether their existing pricing strategy and costs are both sustainable and able to scale.
Frequently Asked Questions
What is a reasonable CAC for a SaaS company?
When it comes to a SaaS company, an ideal Customer Acquisition Cost (CAC) should be able to generate 3-4 times more Lifetime Value per dollar invested. A 5:1 ratio indicates quick growth and success. To figure out the CAC of your business, divide all sales and marketing expenditures by new customer acquisitions over any given period.
How do you calculate average cost of service?
To calculate the average cost of service (ACS) per account, all costs incurred supporting existing customers are divided by the number of accounts for the period. It’s important to note that when calculating ACS, costs associated with existing customers may need to be separated from the costs incurred to attract and onboard new customers. This can be done by applying reasonable percentages to cost centers shown on the Income Statement.
If you’re interested in more cost-related SaaS articles, here are three to check out:
The ROSE Metric
General and Administrative Expenses
Calculating the CAC Payback Period
