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

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 Questions About Gross Margin

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

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

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