What is Gross margin? Definition, Formula & Benchmarks

What is gross margin?

Gross margin is the share of revenue left after the direct cost of delivering your product, shown as a percentage. For software, those direct costs (COGS) are mainly hosting, third-party APIs, and support. Gross margin shows how much of each revenue dollar is free to fund growth.

Formula

Gross Margin = (Revenue − COGS) ÷ Revenue

RevenueTotal sales recognized in the period
COGSDirect cost of delivering the product

Worked example

A SaaS company with $1,000,000 in revenue and $200,000 of COGS (hosting, support, payment fees) has an 80% gross margin, 80 cents of every dollar is available to cover sales, R&D, and overhead.

Benchmarks by stage

Healthy SaaS businesses typically run 70–85% gross margin; investors often treat sub-70% as a signal the model may not scale efficiently. Services-heavy or usage-based startups frequently sit lower and should be able to explain why.

< 50% · Weak

50–70% · Below par

70–85% · Healthy

> 85% · Excellent

Source: SaaS benchmarking studies (SaaS Capital, OpenView) (2025)

Why it matters for fast-growing companies

Gross margin is the ceiling on how efficiently you can grow, it sets how much each new customer contributes toward everything else. It is also a core input to LTV and the Rule of 40, so a weak gross margin quietly drags down the metrics investors use to value you.

Frequently asked questions

What is a good gross margin for a SaaS startup?+

70–85% is the healthy range for software. Below 70% suggests high delivery costs that may limit how efficiently you scale, and investors will want to understand the reason before it affects your valuation.

What counts as COGS for a software company?+

The costs tied directly to serving customers: cloud hosting, third-party APIs and data, payment processing, and customer support or onboarding. It excludes sales, marketing, and R&D, which sit below the gross-margin line.

Gross margin