SaaS gross margin is the percentage of revenue left after the direct costs of delivering your software — hosting, customer support, and infrastructure. The formula is ((Revenue − COGS) ÷ Revenue) × 100. SaaS margins are unusually high (often 70–85%) because there's no physical product, and best-in-class exceeds 80%.
What Is SaaS Gross Margin?
Gross margin is what's left of revenue after the direct costs of delivering your service — your "profit per dollar of revenue" before other expenses. For SaaS, those direct costs include:
- Hosting / server costs
- Customer support costs
- Other direct delivery costs (e.g. third-party APIs)
SaaS companies run higher margins than traditional software because they avoid manufacturing and distribution costs.
SaaS Gross Margin Formula
Gross Margin % = ((Revenue − COGS) ÷ Revenue) × 100COGS = direct cost to deliver the service
Worked example
$100,000 monthly revenue with $10,000 servers + $15,000 support + $5,000 other = $30,000 COGS:
(($100,000 − $30,000) ÷ $100,000) × 100 = 70%Worked example
What's a Good SaaS Gross Margin?
| Gross margin | Rating |
|---|---|
| Below 70% | 😟 Needs improvement |
| 70–75% | 😐 Acceptable |
| 75–80% | 😊 Good |
| Above 80% | 🤩 Excellent |
Why SaaS Gross Margin Matters
- Scalability: shows how efficiently you can grow and your pricing power.
- Investment decisions: guides resource allocation and pricing strategy.
- Valuation: higher margins attract investors and command higher valuations.
SaaS Gross Margin FAQ
How do you calculate SaaS gross margin?
Subtract COGS (hosting, support, direct delivery) from revenue, divide by revenue, multiply by 100: ((Revenue − COGS) ÷ Revenue) × 100. $70K margin on $100K revenue = 70%.
What is a good gross margin for SaaS?
75–80% is good and above 80% is excellent. Below 70% suggests delivery costs are too high or pricing too low for a software business.
What's included in SaaS COGS?
The direct costs of delivering the service: cloud hosting, customer support, third-party APIs, and payment processing — not sales, marketing, or R&D (those are operating expenses).
Why are SaaS gross margins so high?
Software has near-zero marginal cost to serve one more customer — no manufacturing or distribution — so most of each new dollar of revenue flows through as gross profit.
