Gross Margin

What is Gross Margin?

Gross margin is the percentage of revenue remaining after subtracting the direct costs of delivering your product or service. It shows how efficiently you turn revenue into profit before operating expenses.

For SaaS companies, COGS typically includes hosting, third-party software costs, and customer support. Everything else (sales, marketing, R&D, G&A) comes after gross profit.

Why Gross Margin Matters

Gross margin determines how much money you have to run and grow the business. A company with 80% gross margin keeps $0.80 of every dollar for operations. A company with 50% gross margin only keeps $0.50.

High gross margins are a defining characteristic of great software businesses. They enable aggressive investment in growth while still generating profit. Low margins force difficult trade-offs.

Gross Margin Benchmarks

SaaS companies typically achieve 70-85% gross margins. Below 70% suggests infrastructure inefficiency or heavy services component. Above 85% is excellent. Ecommerce margins are much lower, typically 30-50%.

SaaS company financials:

• Revenue: $500,000
• Hosting costs: $25,000
• Third-party APIs: $15,000
• Customer support: $35,000

COGS = $75,000

Gross Profit = $500,000 - $75,000 = $425,000

Gross Margin = $425,000 ÷ $500,000 = 85%

Strong margin typical of well-run SaaS.