Direct costs vs COGs / Contribution Margin vs GM
Hello Folks,
I am quite used to the concept of [Revenue - COGs = GM / GM - Opex = EBIT]
Now I am working on SaaS co-investments, but found out that they use Contribution Margin instead of Gross margin and use direct cost instead of COGs or Opex, which I am not quite familiar with.
[In case A, GP built op model on a following order]
Revenue(using ARR) - direct cost = direct Gross margin
Direct gross margin - centralized cost = Gross margin
Gross margin - overheads(not Opex) = EBITDA
[In case B, another GP built op model on a following order]
Revenue - direct cost = Contribution margin
Contribution margin - overheads = EBITDA
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My question here is, why do investors prefer to use direct cost or contribution margin concept at SaaS investments?
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Direct cost, by definition, is the cost directly related to the production of products or services. Is it okay to use direct cost interchangably with COGs? If not, what is the exact difference?
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In case B, Revenue - direct cost = contribution margin. I understand that direct cost includes both variable cost and fixed cost.
So contribution margin should be Revenue minus variable cost* = CM instead of Revenue minus direct cost
Is this right? Also I was wondering * variable cost here includes Opex. If so, CM minus fixed cost would be EBIT
Thanks for reading!
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