Financial health

Gross Margin

Definition

Revenue minus COGS, expressed as a percentage. SaaS companies typically target gross margins of 70-85%, which reflects the scalability advantage of software delivery.

In depth
3 sections

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.
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$500K+Last-year revenue
RecurringSubscription or repeat revenue
HealthyRetention & gross margins
Questions
Gross Margin

Software has near-zero marginal cost per additional user. Once built, the same codebase serves thousands of customers with only incremental hosting and support costs. This is fundamentally different from physical products or services businesses where each unit sold requires proportional materials, labor, or time.

Gross margin is one of the first metrics lenders and investors evaluate. Companies with 70%+ gross margins qualify for better financing terms and higher valuation multiples. For revenue-based financing, strong gross margins signal that revenue growth translates into real cash flow — making you a lower risk borrower.

Yes, if you have meaningful professional services or one-time revenue. Report both a blended gross margin and a subscription gross margin. Investors care most about subscription gross margin because it reflects the scalable part of your business. Professional services typically carry much lower margins (20-40%) and should not drag down how the market perceives your software economics.

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