Gross Margin
The percentage of revenue remaining after deducting the direct costs of delivering the software or service (Cost of Goods Sold).
FORMULA
Gross Margin % = (Total Revenue - COGS) / Total RevenueWhy it matters
Gross Margin defines the fundamental profitability of the business model. In SaaS, Cost of Goods Sold (COGS) includes hosting costs (AWS, AWS, GCP), third-party software embedded in the product, and customer support and success salaries. A high gross margin (80%+) generates the excess cash needed to fund sales, marketing, and engineering. Low gross margins indicate that the product is expensive to deliver, making it much harder to achieve bottom-line profitability. Investors place a premium on high gross margins because they signal a highly scalable, software-driven delivery model.
2025 BENCHMARK
SaaS Capital 2025 data shows a median gross margin of 78% for private SaaS companies.
COMMON MISTAKES
- Failing to include customer support salaries in COGS.
- Including engineering salaries in COGS (engineering is R&D, not COGS).
- Treating implementation fees as 100% margin without accounting for the human hours required.