Gross Margin
Revenue minus the direct costs of delivering your service, expressed as a percentage.
What it means
SaaS gross margin is your revenue minus the cost of goods sold (COGS) - which includes hosting, infrastructure, customer support, and third-party service costs. High gross margins (75-85%+) are one of the defining characteristics of great SaaS businesses. They indicate that each additional dollar of revenue is highly profitable after covering delivery costs.
Formula
Gross Margin = ((Revenue − COGS) ÷ Revenue) × 100%
Why it matters
Gross margin determines how much of each revenue dollar you can reinvest in growth, R&D, and operations. SaaS businesses with 80%+ margins have far more flexibility than those at 50%. Investors benchmark SaaS gross margins at 70-85% - below 70% raises concerns about scalability.
What is a good gross margin for SaaS?
70-85% is the standard range. Best-in-class SaaS companies achieve 80%+. Below 70% may indicate too-high infrastructure or support costs.
What counts as COGS in SaaS?
Hosting and infrastructure costs, customer support salaries, third-party service fees (APIs, tools), and payment processing fees.
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