Unit Economics

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Gross Margin

Q: What is gross margin?

Gross margin is the percentage of revenue remaining after subtracting direct costs (COGS). A 75% gross margin means you keep $0.75 of every dollar of revenue after covering the cost of delivering your product.

Q: What is a good gross margin for SaaS?

SaaS businesses should target 75-85% gross margins. Best-in-class achieve 85%+. Below 70% warrants investigation into hosting costs, third-party services, or customer support allocation.

Q: What counts as COGS for software companies?

SaaS COGS typically includes hosting and infrastructure costs, third-party API fees, customer support team costs, payment processing fees, and any directly attributable delivery costs. It excludes sales, marketing, R&D, and G&A.

Q: How can I improve gross margin?

Optimize infrastructure costs (better hosting, caching, CDN), renegotiate vendor contracts, automate customer support, reduce payment processing fees, and increase prices. Price increases improve margin percentage without changing costs.

Gross Margin equals revenue minus COGS divided by revenue, expressed as a percentage. SaaS companies should target 75 to 85% gross margins. E-commerce with physical products typically achieves 30 to 50%. Gross margin determines how much of every revenue dollar is available for growth and profit.

Why Gross Margin Matters

Gross margin sets the ceiling on your business model's profitability. A business with 80% gross margins (typical SaaS) has $0.80 of every revenue dollar available for sales, marketing, R&D, and profit. A business with 30% margins (typical e-commerce with physical goods) has only $0.30. This fundamental difference determines pricing power, scalability, and valuation multiples — high-margin businesses command 10-20x revenue multiples while low-margin businesses trade at 1-3x.

How to Calculate Gross Margin

Subtract COGS from revenue, then divide by revenue and multiply by 100. For SaaS, COGS includes hosting, third-party API costs, and customer support. For e-commerce, COGS includes product cost, shipping, and packaging.

Gross Margin Formula

Gross Margin = ((Revenue − COGS) ÷ Revenue) × 100%

Gross Margin Calculator

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Revenue

Cost of Goods Sold

Gross Margin

75%

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Industry Benchmarks

Segment	Good	Average	Poor
SaaS	>80%	70–80%	<70%
E-Commerce (digital)	>70%	50–70%	<50%
E-Commerce (physical)	>50%	30–50%	<30%
Marketplace	>60%	40–60%	<40%

Expert Tips

SaaS businesses should target 75%+ gross margins. If yours is below 70%, audit hosting costs, third-party APIs, and customer support allocation.

For e-commerce, include shipping, packaging, payment processing, and returns in COGS. Many businesses understate COGS by excluding fulfillment costs.

Gross margin should improve with scale for SaaS (fixed hosting costs spread over more customers) but may decline for e-commerce (shipping costs scale linearly).

Investors use gross margin to categorize businesses: 70%+ is 'software economics', 40-70% is 'services economics', below 40% is 'product economics'. Each has different valuation expectations.

Frequently Asked Questions

What is gross margin?

Gross margin is the percentage of revenue remaining after subtracting direct costs (COGS). A 75% gross margin means you keep $0.75 of every dollar of revenue after covering the cost of delivering your product.

What is a good gross margin for SaaS?

SaaS businesses should target 75-85% gross margins. Best-in-class achieve 85%+. Below 70% warrants investigation into hosting costs, third-party services, or customer support allocation.

What counts as COGS for software companies?

SaaS COGS typically includes hosting and infrastructure costs, third-party API fees, customer support team costs, payment processing fees, and any directly attributable delivery costs. It excludes sales, marketing, R&D, and G&A.

How can I improve gross margin?

Optimize infrastructure costs (better hosting, caching, CDN), renegotiate vendor contracts, automate customer support, reduce payment processing fees, and increase prices. Price increases improve margin percentage without changing costs.

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Business Models Using Gross Margin

Gross Margin is a key metric for these business types. Click any model to see how Revenue Map calculates it automatically.

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