Gross Margin
Revenue minus the direct costs to deliver the product, expressed as a percentage of revenue.
Definition
Gross margin is the percentage of revenue remaining after subtracting the cost of goods sold (COGS), which includes direct costs like hosting, customer support, and payment processing. For SaaS companies, gross margins typically range from 70-85%. Hardware or services companies have much lower gross margins. High gross margins mean the company keeps more of each dollar of revenue to spend on growth, R&D, and salaries.
Why it matters
Gross margin is a key indicator of business quality. Companies with 80%+ gross margins are valued higher because they can scale more profitably. Low gross margins may mean the company needs to raise more capital or cut costs to survive.
Example
A SaaS company has $10M in revenue and $2M in hosting, support, and infrastructure costs. Gross profit is $8M, giving an 80% gross margin. A services company with $10M revenue and $6M in delivery costs has only 40% gross margin.