Wondering how much your VC-backed startup's tax return will cost?   Check out our startup tax cost calculator to get an estimate now!
Q&A icon

Startup Q&A

Back to questions

How to categorize Customer Success expenses on the P&L

Vanessa Kruze, CPA, is a leading expert in startup taxes and tax compliance. Her team at Kruze Consulting has filed thousands of tax returns for companies that have raised billions in VC funding, and her work has been diligenced by leading VCs, attorneys, and M&A teams at the largest technology companies.
Vanessa Kruze, a highly-experienced CPA, brings valuable tax expertise to startups, drawing from her rich background at Deloitte Tax and as a financial controller for a $20 million startup. As the leader of Kruze Consulting, recognized multiple times in the Inc 5000 list, she specializes in navigating the complex tax landscape for startups. Her firm is known for delivering precise and strategic tax solutions, delivering tax credits utilizing advanced tools to ensure compliance and optimize tax benefits for startups throughout the United States.

Table of contents

How should a bookkeeper categorize customer success expenses in the profit and loss statement?

Everybody loves a high gross margin company. Entrepreneurs love it. The venture capitalists love it. Public investors love it. Everyone wants to have a high gross margin company, but when you start loading a lot of expenses into the cost of goods sold that by nature reduces your gross margin. The equation for gross margin is revenue minus cost of goods sold equals gross margin.

Thus, everyone should be very careful about loading expenses into cost of goods sold. Now, of course, you want honestly allocate your customer success costs following GAAP rules, and that’s how we do things at Kruze Consulting, and that’s why this guidance is so helpful.

How to Account for Customer Success

Companies look at customer success in two different ways, which drives different account treatment. Some companies treat it purely as a support organization. Others treat it as a sales organization, they’re in charge of upgrading, renewing or upselling clients and that’s how they pay for those people to work at the company.

When Customer Success is COGS

On one hand, if your company treats it as purely support, and there are no commissions, there are no revenue targets, then that should be in cost of goods sold.  The types of activities that your help team is doing are mainly answering support questions, resolving issues and possibly even implementing new features or API connections for the customers, then put those support costs in cost of goods sold because it’s part of the cost for delivering your service.

Which Customer Success Activities are Sales and Marketing Expenses

On the other hand, if your Customer Success Organization has milestones and commissions and revenue targets, then that is definitely a sales and marketing expense. If they have quotas or upsell responsibilities, that’s sales and marketing. It should go into sales and marketing in the operating expenses category. It’s not going to impact your gross margin. 

Now, there’s something really important here to point out, which is in early-stage companies, oftentimes, the people who are doing support also have like three other jobs. This is the beauty of working at an early-stage company. You get a lot of variety. At Kruze, we see a lot of times where the head of operations is answering questions or the software development team is actually answering support questions. Or maybe there’s one support person, but they’re doing something completely different half of their time.

In those cases, you really want to be smart and you really want to allocate only the portion of the time equivalent to the portion of the salary for that person or those people into COGS. That said, if someone’s doing half their time in operations and half their time in customer support, allocate half of their salary into customer support in COGS, you do not want to fully burden the COGS with people salaries who are doing other things. The danger in that is it could make your gross margin look really low or even negative.

Accounting for Customer Success

There are various components that startup founders often throw around when they talk about “customer success.” So look at these and figure out where they go, into COGS or some other part of operating expenditures.

Professional Services

Professional Services are integral to COGS. This category includes services like software implementation, customization, and training, often outlined in contracts with separate deliverables. These are typically charged separately from the software tool, so you may have a specific revenue line associated with them. Their inclusion in COGS is widely accepted, and when material in amount, their gross margin should be reported separately due to their distinct profitability profile compared to subscription revenue. Some companies have developers who do R&D, and then who do implementation when a new client is signed - if possible, their expenses should be broken out between these two activities and accounted for separately. However, if a developer is working 50, 60 hours a week on R&D and just spends a couple of hours a week on implementation, then this implementation work probably doesn’t meet the definition of materiality and their salary should be kept in R&D, not COGS. 

Support

Support functions are essential in software companies and other technology startups, handling support and bug issues. This category, sometimes contractually defined and included in the software’s price, is a clear component of COGS. In some cases, companies offer a premium support tier at an additional cost. However, at small companies it is possible a founder (or developer) is doing support if it’s only a couple of hours of work a week. In these cases, the support probably doesn’t reach the materiality threshold, and it’s not worth the effort to account for the portion of their salary into COGS. Founders should be aware if they are growing and spending more and more time on support activities, as this means that the company will eventually need to bite the bullet and hire a dedicated support person. One other item with support costs - they tend to move up in a jumpy fashion, as startups need to make a hire, then that hire deals with support until there are too many issues, at which point an additional person is hired. 

Customer Success Management (CSM)

The categorization of CSM in COGS varies, depending on the company’s stage and the specific role of the CSM team. In early-stage companies, CSMs might fill product gaps and act similarly to support staff. Whether CSM expenses are included in COGS depends on how the company utilizes its CSM organization. If these people are doing a lot of sales or if they have a commission for upgrades, repurchase or renewals then it is possible that they fall into sales and marketing. 

Infrastructure Costs
Costs related to cloud services (like AWS, GCP, Azure) for hosting customer accounts, along with any third-party software used for integration or additional services, are straightforwardly included in COGS.

DevOps 

Initially, DevOps costs might not be included in COGS, especially when engineers partake in these tasks part-time. However, as the company grows and a dedicated DevOps team is formed, these costs should be allocated to COGS. It’s all a question of does the company have a person who is dedicated, at a material amount, to maintaining customer servers/infrastructure. Like the other items, is it material. 

Sometimes, we have companies coming from other accounting firms that sell a SAAS product that should be very high gross margin. And we look into the cost of goods sold, and we see that they’ve got tons of salaries and stuff that’s not applicable loaded in cost of goods sold, which again, depresses the gross margin. And this is a big deal for investors. When they’re looking at your profit and loss statement and thinking about the potential of the company, they are absolutely not going to invest in a company with a negative gross margin. That’s the old thing where you’re selling $100 bills for $90. You cannot scale that business. You can’t make up in volume. It’s a bad business. People are not going to want to invest in it.

That’s why, at Kruze Consulting, we take such care and we really focus on what needs to go in the cost of goods sold and customer success is really one of those big ingredients. And that’s why we are experts in the various business models - and their related accounting complexities. Check out our SaaS accounting page or eCommerce accounting pages to see some examples of our specialization.

Be careful, be smart, make sure you do it on a GAAP accounting basis, fully load the cost of goods sold where appropriate, but also be careful because if people are revenue producing and have commission structures, they should be going into sales and marketing in the operating expense category.

Understanding Gross Margins

Not every founder knows accounting terms like COGS or “gross margins.” So let’s learn a bit more about gross margin - a metric investors really care about (and so should founders)!Gross margin is a critical financial metric, especially for startups looking to demonstrate their efficiency and potential to investors. It represents the proportion of each dollar of revenue that the company retains after incurring the direct costs associated with producing the goods or services sold. These direct costs are collectively known as the Cost of Goods Sold (COGS). Gross margin is calculated using the formula:

Gross Margin = ( Revenue − COGS) / Revenue x 100%

A higher gross margin indicates that a company is more efficient at converting sales into actual profit.

READY TO CONNECT FOR A FREE CONSULTATION?

We are the experts at helping seed/VC-backed Delaware C-Corps with their accounting and finances!

Talk to an experienced accountant, not a generic sales person

 Kruze Consulting
Alex Janeck
 Kruze Consulting
Edith Silva
 Kruze Consulting
Randy Hall
Viz AI

$250M+ VC Funding Raised


"I had a great experience working with Kruze Consulting when we raised Series A. They know what VCs need to see, and how to present a startup’s books and finances. If you are going to raise venture capital, you need experts like Kruze."
Chris Mansi

Chris Mansi

CEO

Startup Venture Capital Assistance

With former venture capitalists on staff, our team is here to help you navigate the fundraising process and manage your board of directors

 Kruze Consulting
Scott Orn
COO | Former VC
 Kruze Consulting
Healy Jones
VP FP&A | Former VC
Pequity

Scale Remote Operations & Team


"Kruze has supported us above and beyond basic accounting needs by ensuring we have everything we need to expand and support our team wherever they may be located"
Zack Fisch

Zack Fisch

Head of Operations & Legal

Clients who have worked with Kruze have collectively raised over $15 billion in VC funding.

We set startups up for fundrising success, and know how to work with the top VCs.

 Kruze Consulting
Vanessa Kruze, CPA
Founder & CEO
Kruze Logo

Experienced team helping you

Our account management team is staffed by CPAs and accountants who have, on average, 11 years of experience.

 Kruze Consulting
Bill Hollowsky, CPA
VP of Accounting Services
 Kruze Consulting
Claudine Vantomme, CPA
Controller
 Kruze Consulting
Morgan Avery
SUT/R&D Sr. Tax Accountant
 Kruze Consulting
Beth Bassler
Controller, CPA
Protara Therapeutics

Grew from a 2-person startup to a NASDAQ listed public company.


"The Kruze team helped us grow from a 2-person startup to a NASDAQ listed public company in 2 years. We wouldn’t have gotten public without Kruze’s support. Anyone thinking of launching a startup should make Vanessa their first call!"
Jesse Shefferman

Jesse Shefferman

CEO

Kruze Logo

Get in Touch

Please help us connect with you

How can we reach you?

Our first response is typically via email, so please check your inbox.

Help us have a productive first consultation by providing some additional information.

What year was your startup incorporated?

What is your stage of funding?

(pick up from the list)

Approximately how much funding have you raised?

(please enter a dollar value such as 5000000)

Help us understand what you are looking for:

(Optional, click the ones you need)

Anything additional that you’d like to share?

Optional - if you’d like to share anything else to help us prepare for our consultation, please let us know. We are also happy to sign an NDA, just let us know.

Important Tax Dates for Startups

  Talk to a leading startup CPA