Cost Structure of a B2B SaaS Business

At saas.group, we are analyzing P&Ls of SaaS companies every day - to understand their cost structure and detect potential anomalies.

This is usually followed by a short Q&A session to clarify any open questions.

“Your hosting costs appear to be unusually high - could you maybe elaborate?”

But what is actually “usual”? And how does it differ between bootstrapped and VC-backed businesses?

It is easy to ignore the fact that founders often have no benchmark at all.

Here is my attempt to change that.

Please note that this is a general overview, so you do not necessarily have to take action if you find deviations from the benchmark in your P&L.

Cost structures may vary depending on many other factors like:

• Growth stage (early stage vs. mature)

• ARR level

• GTM (product-led vs. sales-led)

• Industry / Segment

• Geography

• …

Let’s start with a quick refresher on common expense items of a B2B SaaS business:

• Cost of Goods Sold (CoGS)

  → Direct costs of creating and delivering a SaaS product

  → Hosting, Customer Support/Success, Professional services,…

• General & Administrative (G&A) Expenses

  → Costs to maintain operations, regardless of revenue or sales

  → Salaries of admin staff, rent / utilities, legal / accounting,…

• Research & Development (R&D) Expenses

  → Cost of the tech and product teams

  → Salaries, pensions, cost of tools and equipment,..

• Sales & Marketing (S&M) Costs

  → Costs related to growth / customer acquisition activities

  → Salaries of S&M employees, sales commissions, advertising costs,..

• DevOps Expenses

  → Bridge between development and operations, ensuring processes are efficient and reliable.

  → Cost of devops team and tools used,..

The following figures show the respective cost items as a % of ARR and are taken from a study by SaaS Capital in 2023, which surveyed 400+ SaaS companies.

As you can see, bootstrappers spend much less and can therefore operate profitably, while VC-backed startups operate at a loss (which was to be expected).

The biggest difference can be seen in expenditure on sales and marketing (17% vs. 30%, +76%) and on research and development (17% vs. 27%, +59%).

Spending on G&A is also apparently higher for VC-financed startups (10% vs. 17%, +70%), but it does not necessarily add value in terms of generating traction.

Interestingly, the cost structure is fairly similar for slower growth (below median) and higher growth (above median) companies - regardless of the source of financing.

The difference for bootstrapped SaaS companies is negligible.

However, contrary to what you would expect, slow-growth bootstrappers invest MORE in marketing than high-growth ones.

With VC-backed ones, it’s the opposite: higher marketing costs = faster growth. Higher growth companies are also spending 20% more on R&D.

It would be interesting to see a comparison with this year's figures.

Let's wait for an update and see what has changed. 🙂