SaaS Gross Margin is the percentage of revenue that remains after subtracting the direct costs required to deliver your software product or service. It represents how efficiently a SaaS company delivers its services and is one of the most important profitability indicators in subscription-based businesses. The higher your gross margin, the more revenue is available to reinvest in marketing, sales, product development, and operations.
SaaS Gross Margin Formula
Gross Margin (%) = ((Revenue – Cost of Goods Sold) / Revenue) × 100
Where:
- Revenue is typically Monthly or Annual Recurring Revenue (MRR/ARR).
- Cost of Goods Sold (COGS) includes direct expenses tied to product delivery.
What Counts as COGS in SaaS?
Typical components of SaaS COGS include:
- Cloud infrastructure (e.g., AWS, Azure costs)
- Third-party software APIs or licenses
- Customer support (L1 & L2)
- Customer success (if focused on technical support)
- Maintenance & DevOps expenses
- Data storage and delivery costs
What does NOT go into COGS:
- Product development (R&D)
- Sales and marketing
- General admin (G&A)
Example 1: High-Growth B2B SaaS
Company: SyncMaster (collaboration tool for remote teams)
Monthly Revenue: $1,000,000
COGS: $250,000 (cloud infra + support team)
Gross Margin = ((1,000,000 – 250,000) / 1,000,000) × 100 = 75%
A 75% gross margin is considered very healthy in SaaS. It gives SyncMaster significant room to reinvest in growth.
Example 2: B2C SaaS with Heavy Video Streaming Costs
Company: FitStream (on-demand fitness app)
Monthly Revenue: $500,000
COGS: $250,000 (video hosting + support + mobile infra)
Gross Margin = ((500,000 – 250,000) / 500,000) × 100 = 50%
This is relatively low for SaaS and suggests they should explore optimization strategies or pricing changes.
Why Gross Margin is Critical for SaaS
- Investor Benchmark: High-margin SaaS companies are seen as more scalable and investable.
- Cash Efficiency: More margin = more fuel to grow without needing constant capital.
- Pricing Strategy: Low margins may mean underpricing or high delivery costs.
- Profitability Path: Gross margin is the first layer of profitability in the P&L.
Industry Benchmarks
- Best-in-class B2B SaaS: 80–90%
- Typical SaaS: 70–85%
- Video-heavy / B2C SaaS: 50–70%
- Low-margin SaaS: <60% – may indicate issues with infrastructure or inefficient operations
According to KeyBanc Capital Markets SaaS Survey, the median gross margin for SaaS companies is 78%.
Improving SaaS Gross Margin
- Optimize Infrastructure: Migrate to lower-cost cloud plans or CDNs.
- Automate Support: Use AI bots or tiered support models.
- Reassess Vendors: Cut or renegotiate expensive third-party tools.
- Shift to Self-Serve Models: Reduce reliance on manual onboarding or support.
- Move to Annual Plans: Reduces support touchpoints and churn-related costs.
Gross Margin vs. Net Margin
- Gross Margin = Revenue minus COGS (product delivery efficiency)
- Net Margin = Revenue minus all costs (profitability)
SaaS companies are often unprofitable at a net level in early stages but aim for strong gross margins as a signal of scalable unit economics.
Use Cases Across Teams
- Finance: Forecasts profitability, burn rate, and fundraising needs.
- Product: Prioritizes features that lower delivery cost.
- Support: Optimizes staffing and self-service options.
- Leadership: Evaluates efficiency and pricing leverage.
Common Mistakes
- Overlooking Cloud Burden: Costs scale with usage – track per-customer delivery cost.
- Underestimating Support Costs: Support-heavy models increase COGS.
- Including R&D in COGS: This inflates delivery costs inaccurately.
Related Metrics
- Customer Lifetime Value (LTV)
- CAC Payback Period
- MRR/ARR
- Churn Rate
- LTV:CAC Ratio
- Operating Margin
FAQs
Q1: What is a healthy gross margin for SaaS?
A: 70–80% is standard. 85%+ is elite. Anything under 60% needs review.
Q2: How does gross margin affect valuation?
A: Investors prefer higher-margin companies as they indicate better scalability and capital efficiency.
Q3: Can you have negative gross margin?
A: Yes — if COGS exceeds revenue. This is typically unsustainable in SaaS unless temporary (e.g., high support launches).
Q4: How often should I track gross margin?
A: Monthly for startups; quarterly at a minimum.
Key Takeaway
Gross Margin tells the story of how efficiently you deliver your software. In SaaS, it’s a make-or-break metric – not just for survival but for scalability.
“You can’t scale what you can’t deliver efficiently. Gross margin shows how strong your SaaS engine really is.”