Gross Margin
DEFINITION
The percentage of revenue left after deducting the direct cost of delivering the service (hosting, support, payment fees).
In depth
For SaaS, gross margin is typically 70–85%. Below 70% usually means infrastructure or support costs are eating too much of each dollar. Above 85% often signals the business isn't yet paying for the customer success it needs.
Unlike marketing or sales costs, gross margin is inside every pricing decision. Drop the price and you lower revenue; drop the hosting cost and you lift margin permanently.
Formula & example
Gross Margin = (Revenue − COGS) ÷ Revenue
EXAMPLERevenue $1M, hosting + support + payment fees = $180K → Gross Margin = ($1M − $180K) ÷ $1M = 82%.
Rules of thumb
- SaaS target: 70–85%. Public SaaS median is ~75%.
- Under 60% is unusual for pure SaaS — investigate the cost structure.
- Use gross margin in LTV, not revenue.
Related terms
LTV
The total revenue a single customer generates across their entire relationship with your SaaS.
COGS
The direct costs of delivering your SaaS service to a customer — hosting, third-party APIs, payment fees, customer support.
Unit Economics
The revenue and cost of a single customer or transaction, used to prove the business model works before scaling.
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Last reviewed 14 April 2026 by Abhi Verma.