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Financial Metricsessential

Gross Margin

The percentage of revenue remaining after deducting direct costs of goods sold.

Formula
Gross Margin = ((Revenue - COGS) ÷ Revenue) × 100%
Example

Revenue of $100,000 with $30,000 COGS = 70% gross margin. For SaaS, this is on the lower end.

Good Range

70%+ for SaaS, 30%+ for e-commerce

Warning Range

Below industry benchmarks indicates pricing or cost issues

Complete Definition

Gross margin represents the percentage of revenue that remains after subtracting the direct costs of delivering your product or service (Cost of Goods Sold or COGS). It's a fundamental measure of business efficiency and pricing power.

How to Calculate

Gross Margin = ((Revenue - COGS) ÷ Revenue) × 100

What's Included in COGS

- **SaaS**: Hosting, infrastructure, customer support, payment processing - **E-commerce**: Product cost, shipping, packaging - **Marketplace**: Transaction processing, seller payments - **Hardware**: Components, manufacturing, shipping

Gross Margin Benchmarks by Business Type

- **SaaS**: 70-90% (often 80%+) - **E-commerce**: 20-50% - **Marketplace**: 60-80% - **Hardware**: 30-50% - **Services**: 40-60%

Why Gross Margin Matters

- Determines pricing power - Impacts scalability - Affects unit economics - Influences company valuation - Shows operational efficiency

Improving Gross Margin

- Negotiate better supplier terms - Increase prices strategically - Reduce hosting/infrastructure costs - Automate customer support - Optimize product mix

Used in:Financial ProjectionsProfitability Analysis

Related Terms

Unit Economics
The direct revenues and costs associated with a single unit of your business model.
Customer Lifetime Value (LTV/CLV)
The total revenue a business can expect from a single customer account throughout their relationship.

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