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For SaaS startups, gross margin isn't just another metric—it’s a lens through which investors evaluate your scalability, pricing strategy, and long-term viability. Miscalculating it—or misunderstanding what to include—can lead to poor strategic decisions and mislead potential investors or acquirers.
This guide breaks down what gross margin means for SaaS businesses, the common mistakes founders make when calculating it, and how to get it right from day one.
Gross margin represents the percentage of revenue that remains after subtracting cost of goods sold (COGS). In SaaS, where margins are typically high, this number is a powerful indicator of how efficiently you can deliver your product. It signals to investors:
A healthy SaaS gross margin is typically 70% or higher, though this varies depending on the stage and model.
Many founders struggle to identify the correct COGS components in a SaaS model. Here’s a breakdown of what generally belongs in COGS:
✅ Hosting and infrastructure costs (e.g., AWS, Google Cloud)
✅ Third-party tools directly tied to product delivery
✅ Customer support and success salaries
✅ Software license fees for core product functions
✅ Ongoing platform maintenance
Avoid the common mistake of including R&D, sales and marketing, or general administrative expenses. These belong in operating expenses, not COGS.
Once COGS is accurately identified, the formula is straightforward:
Gross Margin (%) = [(Revenue - COGS) / Revenue] x 100
📊 Example:
If your SaaS product generates $1,000,000 in annual revenue and your COGS is $250,000:
Gross Margin = [(1,000,000 - 250,000) / 1,000,000] x 100 = 75%
This indicates strong efficiency in delivering your product.
Even with the right formula, founders often run into trouble by:
Inaccurate gross margin can lead to poor fundraising outcomes, especially in due diligence when VCs expect clean, standardized metrics.
Gross margin isn’t fixed—it’s a number you can improve by:
These levers don’t just increase margin—they enhance your valuation.
Gross margin tells the story of your product’s profitability at scale. Getting it right—and optimizing it over time—is key to attracting investors, planning sustainably, and building long-term value.
Want to ensure your margins and metrics are accurate and investor-ready? Work with finance professionals who understand the nuances of SaaS and can guide you with clarity and strategy.
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