PS Margins Calc Assistance
Hi there!
I have services resources that 1) do some configuration work that's included in the license for our subscription product (its a saas marketing tech), 2) deliver on the professional services that we sell, and 3) contribute to internal projects. For our margins calcs, we use the hours tracked in our PSA on the subscription product in our subscription margin calc and the hours tracked in our PSA on the professional services for our services margin.
I have two questions on how to manage the remaining bucket outside of those subscription OR services hours (Internal projects, G&A, etc.).
- Do you attribute 100% of those other hours to your COGs? Or do you have a part of them hit your company G&A and then part of it hit COGs? I have to imagine that a resource that is on your bench should still hit COG even if they didn't allocate hours to a subscription or service product, right?
- (Assuming those other hours are to hit COGs) In my situation, where I have both subscription and services hours, how to do you distribute the other hours amongst the two? I was thinking of taking the ratio of Subscription to Service hours and applying that ratio to the other hours to get the full COG hit for each.
Thank you! Let me know if you have any clarifying questions!
Best Answer
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We typically see our clients categorize internal hours / costs to the services P&L / margin. In fact, many SaaS companies put all of the services costs (including subscription configuration) into the services P&L, making the subscription margins more attractive.
This is primarily driven by three factors:
1) The notion that the valuation multiples on subscription growth and margins are much higher than on services margin.
2) The subscription pricing doesn't often explicitly price in the cost of configuration services.
3) Avoids the complexity / manual calculations that you describe in your point #2.
Happy to discuss further if needed - just let me know.
Thanks,
Neil
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Answers
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In my prior experience (this is going back many years...), if a PS resource was not directly billable, their time was allocated to COGs. Typically if a resource is on the bench, you can then further show their time allocation to pre-sales and training, just as an example.
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Thank you, @Lynn Fraser and @Neil Jain! Much appreciated to you both.
@Neil Jain, I do love the simplicity of that. Do you know if this methodology has had to change/evolve now that ASC 606 is in place?
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I would defer to someone is more familiar with the nuances of ASC 606, but my understanding is that if you include the price & cost of the service in the subscription you have to recognize the revenue over the term of the subscription.
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