What it is
Gross margin is the share of revenue remaining after subtracting the cost of goods sold (COGS), the direct costs of delivering what you sell. It shows how much each dollar of sales contributes before overhead.
Facts
- Gross margin % = (Revenue - COGS) / Revenue x 100.
- SaaS businesses typically target 70-90% gross margins.
- COGS for software includes hosting, third-party APIs, and payment processing, not sales or R&D salaries.
- Higher gross margin means more of each sale funds growth, and higher valuation multiples.
Who it's for
Every founder, especially those pitching investors or comparing business-model quality.
How it helps you
Gross margin tells you whether the core business is fundamentally profitable and how much you can spend on growth per dollar of revenue.
Caveats
Don't confuse gross margin with net margin (which includes all overhead). Miscategorizing costs, e.g. leaving hosting out of COGS, inflates margins and misleads investors.
Conclusion
Gross margin measures the quality of your revenue; a high, honest margin means each sale genuinely funds growth and commands a better valuation.