SaaS gross margin
SaaS gross margin is revenue minus the direct cost of delivering the service (hosting, support, payment processing and similar), divided by revenue. It shows how much of each subscription dollar is left to fund growth and overhead, and it is the base for honest LTV and payback calculations.
Formula
Gross margin = (revenue − cost of revenue) ÷ revenue
How to read it
Agree what counts as cost of revenue and apply it consistently. Usage-based and AI-heavy products can have materially lower margins than seat-based software, so margin should be reported by product line.
Further reading
- SaaS gross margin: what counts as COGS and what good looks like
- SaaS unit economics: the framework that tells you if the model works