Gross Margin
Revenue minus COGS as a percentage of revenue.
Overview
Gross margin shows how much revenue remains after direct delivery costs. It sets the ceiling for healthy unit economics.
Gross margin is revenue minus cost of goods sold divided by revenue.
Definition
Define COGS consistently and include support and third‑party APIs tied to delivery. High gross margins enable investing in growth with confidence.
Gross margin shows how much of each revenue dollar remains after direct delivery costs. In SaaS, COGS commonly includes hosting, support, and third‑party APIs. High gross margins enable healthy unit economics and more flexibility to invest in growth.
Formula
Use period revenue and COGS.
Compute (Revenue − COGS) / Revenue × 100% using period values and consistently defined COGS.
Gross margin = (Revenue − COGS) / Revenue × 100%
Example
$100k revenue, $25k COGS → 75%.
Provide a simple revenue and COGS example to illustrate the calculation.
Common pitfalls
Misclassifying support or infrastructure, excluding third‑party API costs, or including opex will distort margins.
- Misclassifying support or infrastructure costs
- Excluding third‑party API costs
- Including opex in COGS
- Ignoring refunds or chargebacks
Benchmarks
Typical SaaS gross margin is 70–90%.
Typical SaaS gross margin is 70–90%; vary by product mix and infra costs.
Notes
Define COGS consistently and include support that directly delivers customer value.
- Define COGS consistently
- Include support that directly delivers customer value
Related terms
Gross margin relates to net margin and payback and informs pricing and cost strategy.
FAQs
FAQs address what belongs in COGS and whether salaries are included.
Include salaries?
Include support and infra directly tied to delivery.