What is Gross Margin?
Also known as: gross profit margin
Gross Margin is the percentage of revenue left after subtracting the direct cost of delivering the product or service (cost of goods sold).
What is Gross Margin?
Gross margin determines how much of each revenue dollar is available to fund growth, R&D, and profit. It's why software is such an attractive business model — and it's the multiplier inside LTV and payback calculations.
How to calculate Gross Margin
Worked example
You earn $1,000,000 in revenue and your COGS (hosting, support, payment fees) is $200,000. Gross Margin = ($1,000,000 − $200,000) ÷ $1,000,000 = 80%.
What's a good Gross Margin?
Healthy SaaS gross margins run 75–85%. Below ~70% usually signals heavy infrastructure or services costs that dilute the software model.
Frequently asked questions
What counts as COGS for SaaS?
Hosting and infrastructure, customer support, payment processing, third-party data/API costs, and the portion of DevOps that keeps the service running. Not sales, marketing, or R&D.
Why does gross margin matter for valuation?
Higher gross margin means more cash to reinvest per dollar of revenue, which supports faster, more efficient growth — and higher revenue multiples.