Value Metric
Gross Margin
Gross Margin is the percentage of revenue left after the direct costs of delivering your product or service.
What is Gross Margin?
Gross Margin is the share of revenue remaining after you subtract the cost of goods sold (COGS) — the direct costs of delivering your product, such as hosting, third-party APIs, payment processing, and support. It tells you how much of every dollar of revenue is actually available to fund sales, R&D, and profit.
For software businesses, gross margin is a defining trait: high margins are what make SaaS attractive, because each additional customer costs very little to serve.
How to calculate it
Gross Margin = (Revenue − Cost of Goods Sold) ÷ Revenue × 100
- Revenue
- Total revenue in the period
- COGS
- Direct cost of delivering the product (hosting, support, fees)
Worked example
On $1,000,000 of revenue with $200,000 of COGS, gross margin = ($1,000,000 − $200,000) ÷ $1,000,000 × 100 = 80%.
What good looks like
- Good (SaaS)70–85%
Best-in-class software businesses sustain gross margins around 80%; sub-60% suggests high delivery costs to investigate.
Source: OpenView — SaaS Benchmarks
Why it matters
Gross margin sets the ceiling on profitability and on how much you can afford to spend acquiring and serving customers. It also feeds directly into lifetime value — the higher your margin, the more each retained customer is worth. Falling margins are an early warning that delivery costs are outpacing pricing.
How to improve Gross Margin
Reduce cost to serve
Automate support, optimize infrastructure spend, and renegotiate third-party costs so each customer costs less to deliver.
Improve pricing and packaging
Align price with the value delivered and test packaging changes to lift revenue without proportionally raising costs.
Frequently asked questions
What is a good gross margin for SaaS?
Most healthy SaaS businesses run gross margins between 70% and 85%, with best-in-class companies around 80%. Margins below 60% usually signal high infrastructure or support costs that are worth investigating.
What is the difference between gross margin and net margin?
Gross margin subtracts only the direct cost of delivering the product (COGS). Net margin subtracts all costs — including sales, marketing, R&D, and overhead — to show the final profit left from each dollar of revenue.