What SaaS gross margin measures
Gross margin is the share of revenue left after paying the costs of delivering your product. In SaaS those costs are mostly hosting, the software you build on, and the people who keep customers running: support and onboarding. Whatever is left is gross profit, and it pays for everything else, from sales and marketing to product development and overheads.
It is one of the first numbers investors and buyers look at, because it shows how much of each new sale the business actually keeps. Two companies with the same revenue can be worth very different amounts if one keeps 80% and the other keeps 55%.
How to calculate gross margin
Gross margin = (Revenue − Cost of revenue) ÷ Revenue × 100.
- Take revenue for one period, a month, quarter or year. Use recognised revenue, not cash collected.
- Add up cost of revenue for the same period, line by line.
- Subtract cost of revenue from revenue to get gross profit.
- Divide gross profit by revenue and multiply by 100.
Keep every line in the same period. Mixing annual hosting bills with monthly revenue is the most common way to get a wrong answer.
What belongs in cost of revenue
Cost of revenue (often called COGS) covers the costs that rise as you serve more customers. For most SaaS companies that means:
- Hosting and infrastructure: servers, databases, storage, bandwidth and monitoring for the live product.
- Third-party software built into the product, such as licensed APIs, email sending or mapping services.
- Customer support: support team pay and help desk tools.
- Onboarding and implementation: setup, data migration and training for new customers.
- Payment processing: card and billing fees. Some companies book these as general expenses instead; pick one approach and stick to it.
What does not belong: sales and marketing, research and development, and general and administrative costs. Engineers building new features sit in R&D, even if some of their time goes on keeping the platform running. Splitting that time honestly is better than leaving it all out.
A worked example
A SaaS company brings in $100,000 of revenue in a month. Its cost of revenue looks like this:
- Hosting and infrastructure: $9,000
- Third-party software: $3,000
- Customer support: $5,500
- Onboarding and implementation: $2,500
- Payment processing: $2,000
Total cost of revenue is $22,000, so gross profit is $78,000 and gross margin is ($100,000 − $22,000) ÷ $100,000 × 100 = 78.0%. Every $1 of revenue leaves $0.78 to fund the rest of the business.
Hosting is the largest line at $9,000, 41% of cost of revenue and 9.0% of revenue. Cutting it by 20% would lift gross margin to 79.8%. To reach 80%, the company would need to bring cost of revenue down by $2,000 to $20,000, or grow revenue to $110,000 without adding cost.
Gross margin benchmarks for SaaS
Software usually runs higher margins than most businesses, because serving one more customer costs little. As a rough guide:
- 80% and above is strong, and common for self-serve products with light support needs.
- 70% to 80% is the usual range for SaaS.
- 60% to 70% is below target. Heavy hosting, data or support costs are the usual reasons.
- Below 60% looks more like a services or hardware business than software.
It depends on the model. Products that process a lot of data, run AI workloads or include a large services component often sit lower, and early-stage companies can carry setup costs that fall away with scale. Compare yourself with businesses that sell the same way you do, and watch the trend over time more than any single number.
How to improve gross margin
Start with the largest line, because a small percentage cut there moves the margin most.
- Right-size infrastructure. Remove idle resources, commit to reserved capacity once usage is stable, and review data storage you no longer need.
- Renegotiate third-party contracts as volume grows, or replace tools that cost more than they earn.
- Scale support without headcount: better help content, in-product guides and fixing the issues that create the most tickets.
- Standardise onboarding with templates and self-serve setup, or charge for implementation work that is genuinely custom.
- Raise prices or package better. Revenue sits in the divisor too, so a price rise on the same cost base lifts margin directly.
Related tools
Gross margin feeds straight into customer lifetime value, so try the SaaS LTV Calculator next. Check whether growth and profit together clear the bar with the Rule of 40 Calculator, or see your main numbers side by side in the SaaS Metrics Calculator. If revenue growth is the lever you need, see our services.