Gross margin is the percentage of revenue remaining after subtracting the direct costs of delivering the product (cost of goods sold or COGS). For SaaS businesses, COGS typically includes hosting, infrastructure, third-party API costs, payment processing fees, and customer support directly tied to product delivery. High gross margins are a defining characteristic of software businesses and a key driver of valuation multiples.
Gross margin shows how much of each revenue dollar is available to cover operating expenses and fund growth. High gross margins are why investors love SaaS.
It directly affects LTV calculations, payback periods, and how much you can afford to spend on acquisition.
Hosting and infrastructure (AWS, GCP, etc.), third-party API costs, payment processing fees, and customer support directly tied to product delivery.
Excludes sales and marketing, R&D, and general administrative costs. These are operating expenses below the gross margin line.
Pure SaaS: 70-85%. SaaS with services: 50-70%. Marketplace: 60-75%. Hardware+software: 40-60%.
Investors expect SaaS gross margins above 70%. Below 60% raises questions about the business model.
Revenue $100k/mo. Hosting $8k, APIs $5k, payment fees $3k, support $4k = COGS $20k. Gross margin = ($100k - $20k) / $100k = 80%.
Burying costs below the COGS line to inflate margins. Investors will reclassify during due diligence.
Not including payment processing fees (Stripe takes 2.9% + $0.30).
Ignoring third-party API costs that scale with usage.
Financials slide: gross margin % with brief COGS breakdown. Highlight if improving over time.
Gross margin 80% (hosting, APIs, payments in COGS).
Use gross profit (not revenue) for LTV and payback calculations.
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