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Financial & Unit Economics

Gross Margin GM%

CFO CEO CMO VP Engineering

Gross Margin measures the percentage of revenue remaining after subtracting the direct cost of delivering the product or service (Cost of Goods Sold). For SaaS companies, COGS typically includes hosting infrastructure, customer support, and professional services delivery. Gross margin is the foundation of all other profitability metrics and determines how much revenue is available to fund growth, R&D, and overhead.

SaaS gross margin is structurally higher than product businesses because software marginal delivery cost is near-zero; this is the core economic advantage of the SaaS model.

Formula
(Revenue – COGS) ÷ Revenue × 100
Where It Lives
  • QuickBooks / NetSuiteCOGS tracking and gross margin P&L reporting
  • StripeRevenue recognition with cost allocation
  • LookerCustom gross margin dashboards by product line or segment
  • SalesforceDeal-level margin analysis for product mix decisions
What Drives It
  • Infrastructure hosting costs relative to revenue
  • Customer support headcount and cost per ticket
  • Professional services delivery cost as a percentage of services revenue
  • Pricing power relative to direct product costs
  • Engineering efficiency improvements reducing infrastructure spend
Causal Analysis: Infrastructure optimization initiatives can be causally tied to gross margin improvements; A/B testing cloud architecture changes and measuring cost-per-unit outcomes is a rigorous approach.
Benchmark

Best-in-class SaaS gross margins are 75%–85%; below 60% for a SaaS business usually indicates high infrastructure costs or a services-heavy model.

Common Mistake
Excluding customer success and support salaries from COGS and treating them as operating expenses, which overstates gross margin relative to industry standards.

How different roles think about this metric

Each function reads GM% through a different lens and takes different actions when it changes.

CFO
The CFO tracks gross margin as the foundation of the unit economics model and monitors it closely when infrastructure costs or service delivery costs change.
CEO
The CEO uses gross margin to assess the quality and scalability of the business model when presenting to investors and boards.
CMO
The CMO needs gross margin data to correctly calculate LTV on a margin-adjusted basis for CAC efficiency decisions.
VP Engineering
The VP Engineering monitors infrastructure cost as a component of COGS and drives efficiency initiatives that directly improve gross margin.

Common Questions About Gross Margin

Click any question to expand the answer.

What is included in SaaS COGS?
SaaS COGS typically includes: cloud infrastructure and hosting costs (AWS, GCP, Azure), third-party SaaS tools embedded in the product, customer support staff salaries and tools, professional services and implementation delivery costs, and payment processing fees. Sales salaries, marketing spend, and R&D are operating expenses, not COGS.
Why is SaaS gross margin typically higher than other industries?
Software has near-zero marginal cost to deliver an additional unit. Serving one more customer costs almost nothing once the product is built and infrastructure is scaled. This contrasts with manufacturing (physical goods must be produced) or professional services (labor must be deployed). As SaaS revenue grows, COGS grows much more slowly, producing the leverage that makes SaaS margins structurally superior.
How does customer success fit into gross margin calculation?
This is debated but the most conservative (and investor-preferred) treatment includes customer success salaries in COGS because CS is a direct cost of delivering ongoing product value. Some companies include only implementation/onboarding CS in COGS and treat ongoing renewals CS as an operating expense. Whichever treatment you use, be consistent and disclose it when sharing metrics externally.
How can an engineering team improve gross margin?
Engineering can improve gross margin by optimizing cloud infrastructure costs through right-sizing instances, using reserved pricing, and improving database query efficiency. Moving from general-purpose compute to purpose-built data services, implementing caching to reduce database load, and adopting multi-tenant architectures that share infrastructure across customers are all levers engineering can pull to directly reduce COGS.

Related Metrics

Metrics that are commonly analyzed alongside GM%.

Operating Margin | Operating Margin EBITDA | EBITDA COGS | Cost of Goods Sold RPE | Revenue Per Employee

Role guides that include this metric

See how each role uses GM% in context with the full set of metrics they own.

CFO Guide → CEO Guide → CMO Guide → VP Engineering Guide →
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