RGP is the third of seven key SaaS metrics used in our framework and yields the recurring contribution margin of a customer before fixed operational expenses like S&M, R&D and G&A.  If you haven’t yet read prior posts covering tCAC and ARPU, I suggest you start here.

Step 3: Calculate RGP – Recurring Gross Profit

RGP is the gross profit generated each month.  ARPU less recurring Cost of Goods Sold (COGS) will yield RGP.  Typical recurring COGS items include the cost of customer delivery (e.g., datacenter usage), the cost to support the customer (e.g., call centers) and payments to 3^rd parties (e.g., software license fees).  The key is to include all the month-to-month costs required to maintain a customer that is already live on the software, but to exclude the initial expenses necessary to light up a customer (those one-time expenses were captured in tCAC).  There will be a mixture of fixed COGS (e.g., servers) and variable COGS (e.g., merchant fees) here.

Note: RGP does not necessarily conform to GAAP accounting and neither do many of the metrics in this analysis.  Instead we are trying to focus on the intrinsic unit-level economics.  For example, we include onetime costs such as onboarding in tCAC, but they would likely fall under COGS with GAAP accounting.  Similarly, items that typically are capitalized and then depreciated over their lifetime (e.g., devices shipped to the customer) are instead recognized as an upfront cash expense in our framework.  If billing monthly by credit card, we also need to make sure that merchant fees associated with the transactions are included within recurring COGS.

>> Next Step: Gross Margin Payback Period

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