Gross Margin
Revenue minus cost of goods sold (COGS) divided by revenue, expressed as a percentage. In SaaS, COGS includes hosting, infrastructure, customer support, and professional services costs.
Why Gross Margin Defines Your SaaS Business
Gross margin is the most honest metric in your P&L. It tells you how much of every dollar you keep after delivering the product. A SaaS company at 80% gross margin keeps 80 cents. A services company at 40% keeps 40 cents. This difference is why SaaS companies trade at 10-20x revenue and services companies trade at 1-3x.
The Benchmark
Best-in-class SaaS runs at 80%+ gross margin. That means your COGS — hosting, support, delivery — consume less than 20% of revenue. If your gross margin is below 70%, investors will ask tough questions about your delivery model.
What Kills SaaS Gross Margins
Three things: too much professional services revenue, bloated customer support costs, and expensive infrastructure. The fix for PS is productizing your services into the software. The fix for support is self-service documentation and in-app guidance. The fix for infrastructure is optimizing your cloud spend, which most companies neglect.
Gross Margin Trends Over Time
Healthy SaaS companies see gross margins improve as they scale. Fixed costs like infrastructure get spread across more customers. Support becomes more efficient with better tooling. Services revenue becomes a smaller percentage of total revenue. If your gross margin is declining as you grow, something structural is wrong.
Frequently Asked Questions
What is a good gross margin for SaaS?
75-85% is the benchmark for software-only SaaS. Companies with significant professional services or managed services components typically see 60-75%. Below 60% starts to look less like SaaS and more like a services business. Infrastructure-heavy products (data, ML/AI) may run 65-75% and that is acceptable.
What counts as COGS in SaaS?
Hosting and infrastructure costs, customer support salaries, professional services and onboarding team costs, third-party software embedded in your product, payment processing fees, and data costs. Engineering and R&D are NOT COGS — they are operating expenses.
