Gross Margin
The percentage of revenue remaining after subtracting the direct costs of delivering your product.
Definition
Gross margin = (Revenue - Cost of Goods Sold) / Revenue x 100. For SaaS companies, COGS includes hosting, third-party API costs, customer support, and DevOps. SaaS gross margins typically range from 70-85%. Marketplaces run 40-65%. E-commerce is 25-45%. Gross margin determines how much revenue is available for sales, marketing, R&D, and profit.
Investors pay close attention to gross margins because they indicate the fundamental economics of the business model and how much can be reinvested in growth.
Why it matters for founders
Gross margin is the ceiling for your business model. A 20% gross margin means 80 cents of every dollar goes to delivering the product, leaving very little for growth. SaaS companies are valued highly because their 75%+ gross margins fund aggressive growth.
Example
A SaaS company generates $100K MRR. Hosting costs $8K, third-party APIs cost $5K, support team costs $7K. COGS = $20K. Gross margin = ($100K - $20K) / $100K = 80%. This is healthy for SaaS and means $80K/month is available for growth, R&D, and profit.
How Foundra helps
Foundra's Pricing & Packaging card helps you understand your cost structure and set prices that maintain healthy gross margins from day one.
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Related terms
Contribution Margin
The amount each sale contributes toward covering fixed costs and generating profit.
Unit Economics
The revenue and costs associated with a single unit of your business (usually one customer).
Monthly Recurring Revenue (MRR)
The predictable revenue your business generates every month from subscriptions.
Break-Even Point
The point where your total revenue equals your total costs, resulting in zero profit or loss.