The percentage of revenue left after the direct cost of delivering your product, before sales, marketing, and overhead.
Gross margin (%) = ((revenue − cost of goods sold) ÷ revenue) × 100
You earn £100,000 in revenue and spend £18,000 on hosting, payment processing, and support to deliver it.
((£100,000 − £18,000) ÷ £100,000) × 100 = 82% gross margin
Gross margin is the share of each pound of revenue you keep after paying the direct cost of delivering the service — your cost of goods sold (COGS). For SaaS, COGS typically means hosting and infrastructure, third-party software baked into the product, payment processing, and the customer support and success staff needed to keep customers running. It excludes sales, marketing, R&D, and general overhead.
High gross margin is the structural advantage of software. Because serving one more customer costs very little, well-run SaaS businesses routinely post gross margins of 75–80%, with the best pure-software businesses reaching 80–90% — far above most physical-product businesses. That headroom is what funds the heavy spending on growth and product that defines the category.
Gross margin is also a quiet input to nearly every unit-economics metric. Margin-adjusted LTV, CAC payback, and the gross-margin-based view of efficiency all depend on it, because only the gross-margin portion of revenue is actually available to repay acquisition cost or fall to the bottom line.
Gross margin sets the ceiling on how profitable and efficient your business can ever be — every other cost comes out of what it leaves behind. It is the input that makes LTV, CAC payback, and the Rule of 40 honest, and a low or falling margin quietly caps your growth no matter how well sales performs.
Healthy SaaS gross margins sit around 75–80%; best-in-class pure-software businesses reach 80–90%. Margins much below 70% often signal heavy infrastructure costs, a services-heavy mix, or pricing that does not cover the true cost of delivery.
Typically hosting and infrastructure, third-party software embedded in the product, payment processing fees, and the support and customer-success staff needed to deliver the service. Sales, marketing, R&D, and general overhead are excluded.
Only the gross-margin portion of revenue is real value. Margin-adjusted LTV and CAC payback both multiply by gross margin, because the rest is consumed serving the customer.
Around 75–80% is healthy, and 80–90% is best-in-class for pure-software businesses. Margins well below 70% usually point to heavy infrastructure costs or a services-heavy revenue mix.
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