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David Spitz's avatar

Even though bringing into COGS hurts the gross margin (as you correctly argue -- something that doesn’t “look good”) I feel that the S&M company expense should record activities focused on selling and marketing as opposed to satisfying and renewing.

I like the idea of the recurring expenses of satisfying and renewing to help in COGS.

When you think about the exercise of estimating LTV and CAC -- something that’s done wrong so many times, since people make bad assumptions about churn especially, but also about what the ongoing costs each year are -- putting these ongoing renewal costs in COGS feels smarter /better.

Nonetheless, if I were the decided and CFO -- in this world, I wouldn’t put 80% in COGS, as you would look “worse” than your peers.

And I think ultimately m, you’re trying to steer people to make the right choices given the facts and comparable of today.

So yeah I suppose I wouldn’t “advise” people to put 80% into COGS today unless we could get everyone else to treat it the same way (of course that’s impossible!)

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David Spitz's avatar

Great topic! Once again, you and I are so aligned in what interests us and what we feel needs to be discussed and better understood!

Here is where I come out:

All activities - and related expenses -- associated with ongoing maintenance, support, satisfaction and ultimately renewal of existing customers -- even if the CSM is spiffed on the renewal -- should be in COGS. I suspect in most companies this is 80% or more of the CSM expense.

All activities focused on upsell/expansion should be in S&M. I’d be ok if we only put commissions paid to CSMs associated with such upsells -- although you could argue that if substantial time was dedicated to such activities that you should allocate some of their base salary to the S&M line.

So -- it should be split in most cases. Not 100% in one bucket of the other.

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