Gross Profit Margin
Gross margin is the percentage of revenue remaining after subtracting the direct costs of delivering your product or service (COGS). For SaaS, this primarily means hosting, support, and customer success costs.
Revenue: $500K. COGS (hosting, support): $100K. Gross Margin = ($500K - $100K) / $500K = 80%.
Gross margin determines how much of every dollar you can reinvest in growth. SaaS businesses should have 70-85% gross margins. Lower margins limit how much you can spend on sales and marketing while remaining profitable.
Best-in-class SaaS
Good SaaS
Services-heavy
Red flag
Include: hosting/infrastructure, payment processing fees, customer support salaries, customer success salaries (portion), third-party software costs for delivery, and professional services if bundled.
Higher gross margin = more cash flow = higher multiple. A SaaS company at 80% gross margin is worth more than one at 60% because more of every dollar flows to profit.
Optimize hosting costs (right-size infrastructure), reduce support load (better documentation, self-serve), increase automation, and consider pricing increases.
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