Gross Margin

TL;DR

The percentage of revenue remaining after subtracting cost of goods sold (COGS), reflecting the unit economics of delivering the product.

Gross margin is the revenue left over after the direct costs of delivering the product — hosting, customer support, payment processing, third-party services. It's the most fundamental unit-economics measure: low gross margin caps how much the company can spend on sales, marketing, R&D, and operations.

SaaS gross margin typically runs 70–85%; transactional businesses 30–60%; e-commerce and marketplaces vary widely depending on take rate. The trend matters as much as the level — gross margin should expand as the company scales.

Formula

Gross Margin = (Revenue − COGS) ÷ Revenue

• Revenue — Net revenue in the period
• COGS — Direct cost of delivering the product (hosting, support, processing)

Worked example

SaaS revenue $10M, COGS (hosting + customer support + payment processing) = $1.8M. Gross margin = ($10M − $1.8M) ÷ $10M = 82%. Marketplaces typically run 50–70%; pure SaaS 75–85%; managed services 30–50%.

Common pitfalls

• Excluding important direct costs (support, infrastructure) from COGS.
• Comparing gross margin across business models that don't compare.
• Ignoring gross margin trend when it's quietly compressing.

When this shows up in a pitch deck

Gross margin appears on the Financials and Unit Economics slides; weak gross margin caps the rest of the model.

See Gross Margin in context

Gross Margin shows up most often in these scoring rubrics and investor profiles — jump straight to who cares about it and how to pitch them.

In VC frameworks

• Tiger Global — pitch deck framework
• Family Office — pitch deck framework

For investor types

• Private Equity — Profitability & Scale

Related terms

• LTV — Lifetime Value — the total margin a customer is expected to generate over their entire relationship with the company.
• CAC Payback Period — The number of months required for the gross profit from a customer to repay the cost of acquiring them.
• Rule of 40 — A SaaS health benchmark: revenue growth rate plus profit margin should sum to at least 40%.
• Burn Multiple — Net new ARR divided by net burn — the dollars of capital consumed per dollar of new ARR generated.
• Take Rate — The percentage of gross transaction value a marketplace or platform retains as revenue, usually charged to the supply side, the demand side, or both.

Use this in your next pitch deck

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