Gross Margin
Definition
Gross margin is gross profit expressed as a percentage of revenue, showing how much of each revenue dollar remains after covering the direct costs of delivering the product or service. SaaS companies typically have gross margins of 70-85 %, reflecting the low marginal cost of software delivery.
Formula
Overview
Gross margin translates gross profit into a percentage that enables comparison across companies of different sizes. It answers the question: for every dollar of revenue, how many cents go toward covering operating expenses and generating profit?
For SaaS businesses, gross margin is a strong indicator of business model quality. Margins of 70 to 85 % are standard, with best-in-class companies exceeding 80 %. Lower margins may indicate heavy infrastructure costs, expensive third-party APIs, or a services-heavy delivery model that limits scalability.
Investors pay close attention to gross margin trends. Improving gross margins suggest increasing economies of scale and operational efficiency. Declining margins may signal rising infrastructure costs, pricing pressure, or a customer mix shifting toward lower-margin segments. Gross margin also directly impacts unit economics, as it is a key input to gross-margin-adjusted LTV and CAC payback calculations.
Example
Revenue of $120K and COGS of $30K yields a gross margin of ($120K − $30K) ÷ $120K × 100 = 75 %.
Related Articles
Related Calculators
Track Gross Margin and more with culta.ai
Start free and get real-time visibility into the metrics that matter for your startup.