Gross Margin
Revenue minus COGS, expressed as a percentage. SaaS companies typically target gross margins of 70-85%, which reflects the scalability advantage of software delivery.
What Is Gross Margin?
Gross margin is revenue minus cost of goods sold (COGS), expressed as a percentage of revenue. It measures how much of each dollar of revenue remains after covering the direct costs of delivering your product. For SaaS companies, gross margin reflects the inherent scalability of software — more customers without proportionally more delivery cost.
How to Calculate Gross Margin
Gross Margin = ((Revenue - COGS) / Revenue) x 100
For a SaaS company with $1M in quarterly revenue and $200K in COGS, gross margin is 80%. Include only direct costs (hosting, support, payment processing) in COGS — not sales, marketing, or R&D expenses.
SaaS Gross Margin Benchmarks
Best-in-class SaaS companies achieve 75-85%+ gross margins. The median for public SaaS companies is around 72%. Margins below 60% suggest you may have a services component or unusually high infrastructure costs that need addressing. Gross margin is a key input to SaaS valuation — higher margins command higher multiples.
