SaaS Gross Margin

What Is SaaS Gross Margin?

Gross margin is what’s left of your revenue after paying the direct costs of delivering your software service. Think of it as your “profit per dollar of revenue” before other expenses. 💰

It includes:

• Revenue from subscriptions
• Minus hosting costs
• Minus customer support costs
• Minus other direct delivery costs

👆 By the way, an interesting fact: SaaS companies typically have higher gross margins than traditional software companies because they don’t have physical product costs like manufacturing and distribution.

Why Is Gross Margin Important?

Scalability Indicator 📈

• Shows how efficiently you can grow
• Indicates pricing power
• Reveals operational efficiency

Investment Decisions 💡

• Guides resource allocation
• Helps prioritize features
• Informs pricing strategies

Valuation Impact 💎

• Higher margins = higher valuations
• Shows business model strength
• Attracts investors

How to Calculate Gross Margin?

The Formula for Gross Margin

Gross Margin % = ((Revenue – Cost of Goods Sold) / Revenue) × 100

Where:

COGS = Direct costs to deliver your service

Example Time! ✨

Let’s say:

• Monthly Revenue: $100,000
• Server Costs: $10,000
• Support Costs: $15,000
• Other Direct Costs: $5,000

Calculation:

• COGS = $30,000
• Gross Margin = (($100,000 – $30,000) / $100,000) × 100 = 70%

What’s a Good Gross Margin for SaaS Companies?

Industry Benchmarks:

• Below 70%: 😟 Needs improvement
• 70-75%: 😐 Acceptable
• 75-80%: 😊 Good
• Above 80%: 🤩 Excellent!

Remember: High gross margins are great, but they shouldn’t come at the expense of customer satisfaction or product quality! It’s all about finding the right balance. 🎯