If you run a SaaS business, you’ve probably heard investors ask, “What’s your gross margin?” It’s not just another finance term—it’s a signal of efficiency and scalability.
The good news is, calculating your SaaS gross margin is straightforward once you know what to include and what to avoid.
What Is SaaS Gross Margin?
SaaS gross margin shows how much money you keep after paying for the direct costs of delivering your product. Think of it as your “true revenue” after covering hosting, cloud services, and customer support.
Formula:
Gross Margin (%) = (Revenue – Cost of Goods Sold) ÷ Revenue × 100
- Revenue: Subscription and service income.
- COGS (Cost of Goods Sold): Hosting, APIs, DevOps, customer support.
A strong SaaS company usually runs at 70–85% gross margin. Anything above 80% is world-class.
What Counts as COGS in SaaS?
One mistake founders make is misclassifying costs. Here’s a simple way to test: If I cut this expense, would the product still work for customers?
| Included in COGS | Excluded from COGS |
|---|---|
| Hosting (AWS, GCP, Azure) | Sales & marketing salaries |
| Third-party APIs and integrations | R&D or product development |
| Customer support team | HR, legal, admin overhead |
| DevOps and delivery costs | Office expenses |
This clarity prevents inflated margins that don’t hold up in due diligence.
Subscription vs. Services Margin
Not all revenue is created equal. Investors often want to see margins by revenue stream:
- Subscription Margin = (Subscription Revenue – Subscription COGS) ÷ Subscription Revenue × 100
- Services Margin = (Service Revenue – Service COGS) ÷ Service Revenue × 100
Services often run at lower margins (20–40%), while subscriptions can reach 80%+. If you blend them, your real performance may be hidden.
👉 Use the SaaS Profit Margin Calculator to break down both streams.
Example: Calculating SaaS Gross Margin
Let’s say:
- Revenue: $1,000,000
- COGS: $250,000
Gross Margin = (1,000,000 – 250,000) ÷ 1,000,000 = 75%
That means you keep $0.75 for every $1 of revenue after paying delivery costs.
Want to test your own numbers? Try the SaaS ROI Calculator to see how margin impacts return on investment.
Why Gross Margin Matters
- Scalability → Proves your model can grow without costs ballooning.
- Valuation → Investors pay higher multiples for companies with 80%+ margins.
- Cash Planning → Higher margin means more cash to reinvest in product and growth.
- Benchmarking → Compare against industry peers and find weak spots.
If your margin is low, it may point to inefficient infrastructure or too much reliance on services revenue.
How to Improve SaaS Gross Margin
- Optimize cloud spend → Use the Cloud Cost Optimization Tool to cut unnecessary hosting costs.
- Automate support → Reduce headcount costs with chatbots or self-service help centers.
- Refactor code for efficiency → Check the Code Refactoring ROI Calculator to see if it’s worth the investment.
- Refine pricing tiers → Experiment with the SaaS Pricing Calculator to lift ARPU.
- Negotiate vendor contracts → Especially for APIs and cloud services.
Even a 5% margin increase can make a huge difference at scale.
FAQs: SaaS Gross Margin Explained
Q: What’s a healthy SaaS gross margin?
A: Between 70–85%. Anything above 80% is considered strong.
Q: Should customer success costs be in COGS?
A: Yes, if they directly support product delivery. If they focus on expansion, count them as sales.
Q: Why separate subscription and services margins?
A: Because services usually drag margins down. Separating gives a clearer view of business health.
Q: How often should you calculate it?
A: At least quarterly, alongside revenue forecasting.