Gross Profit
Definition
Gross profit is the revenue remaining after subtracting the cost of goods sold (COGS), representing the money available to cover operating expenses, debt service, and generate net profit. It measures how efficiently a company produces and delivers its product or service relative to the revenue it generates.
Formula
Overview
Gross profit sits between revenue and operating expenses on the income statement and reveals how much money the core product generates before overhead costs. For SaaS companies, COGS typically includes hosting and infrastructure, customer support salaries, payment processing fees, and third-party software costs directly tied to service delivery.
The distinction between gross profit and revenue matters enormously for startups. A company with $100K in revenue but only $40K in gross profit has far less room to invest in growth than one with $100K in revenue and $80K in gross profit. This is why investors focus heavily on gross margin (gross profit as a percentage of revenue).
SaaS businesses typically enjoy gross margins of 70 to 85 %, which is one reason the sector commands premium valuations. If your gross margin is significantly below this range, it may indicate over-spending on infrastructure, excessive support costs, or a services-heavy business model that will be harder to scale.
Example
Revenue of $80K minus $20K in COGS (hosting, support, payment processing) = $60K gross profit, or a 75 % gross margin.
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