Gross Margin
Gross margin is the percentage of revenue remaining after subtracting the direct costs of delivering your product or service.
- Gross margin measures profitability after direct costs (COGS), expressed as a percentage of revenue. It shows how much revenue is available for operating expenses.
- Common Mistakes:
- Including operating expenses like sales and marketing in COGS (those go below gross margin).
- Not allocating shared costs like infrastructure across products correctly.
- Ignoring support costs when they're directly tied to revenue generation.
- Comparing gross margin across companies with different cost structures.
- Failing to update COGS allocation as the business scales.
- Confusing gross margin with net margin (net includes all operating expenses).
Definition
Gross margin measures profitability after direct costs (COGS), expressed as a percentage of revenue. It shows how much revenue is available for operating expenses.
Software/SaaS businesses with low delivery costs.
Hybrid businesses or services with moderate COGS.
Hardware, resale, or high-infrastructure costs.
Formula
Gross Margin (%) = (Revenue − COGS) / Revenue × 100
Variables
Total sales or subscription revenue.
Cost of Goods Sold: hosting, support, delivery costs directly tied to revenue.
Examples
SaaS gross margin calculation
| Item | Amount |
|---|---|
| Revenue | $100,000 |
| Hosting costs | $8,000 |
| Support costs | $7,000 |
| COGS total | $15,000 |
- 1Gross profit = $100,000 − $15,000 = $85,000
- 2Gross margin = $85,000 / $100,000 × 100 = 85%
Track in Daymark
Data Sources
Required Fields
- period
- revenue
- cogs
Sample Questions
- What is the current gross margin?
- Show gross margin trend over the last 12 months
- Calculate gross margin by product or service line
- What are the biggest components of COGS?
- How does gross margin vary by customer segment?
- Forecast gross margin impact if hosting costs increase 20%
- Compare gross margin to industry benchmarks
Dashboard Template
Margin percentage over time
Revenue and cost breakdown
Where costs go
Compare profitability
Common Mistakes
- •Including operating expenses like sales and marketing in COGS (those go below gross margin).
- •Not allocating shared costs like infrastructure across products correctly.
- •Ignoring support costs when they're directly tied to revenue generation.
- •Comparing gross margin across companies with different cost structures.
- •Failing to update COGS allocation as the business scales.
- •Confusing gross margin with net margin (net includes all operating expenses).
FAQ
Hosting/infrastructure, customer support, professional services delivery, and any costs directly required to serve customers.
Most healthy SaaS businesses target 75-85% gross margin. Below 70% may indicate scaling issues.
Gross margin only subtracts COGS. Net margin subtracts all expenses including S&M, R&D, and G&A.