SaaS Metric
Gross Margin
Definition
Gross margin is the percentage of revenue remaining after the cost of delivering your product — hosting, support, payment fees, and third-party services. Gross margin = (revenue − cost of revenue) ÷ revenue × 100. Healthy software SaaS runs 75–85% gross margin; it sets the ceiling on how much of each dollar can fund growth, and it feeds metrics like LTV and the Rule of 40.
Formula
Gross margin = (revenue − cost of revenue) ÷ revenue × 100 (cost of revenue = hosting/infrastructure, customer support, payment processing, third-party software tied to delivery)
Benchmark
Pure-software SaaS typically runs 75–85% gross margin. Below ~70% suggests heavy infrastructure or services costs; usage-heavy or services-led products sit lower.
What counts as cost of revenue
Cost of revenue (sometimes COGS) is everything directly required to deliver the service to paying customers: cloud hosting and infrastructure, the customer support and success teams, payment processing fees, and any third-party software or data you resell as part of the product. It excludes sales, marketing, R&D, and general overhead — those sit below the gross-margin line.
The line between cost of revenue and operating expense is a judgement call that materially moves the number. Apply it consistently: shifting support headcount in or out of cost of revenue can swing reported gross margin by several points, which distorts every downstream comparison.
Why gross margin sets the ceiling
Gross margin caps how much of each revenue dollar is actually available to fund growth and profit. A company at 80% margin has 80 cents per dollar to spend on acquisition and product; one at 50% has only 50. That is why true customer lifetime value uses gross-margin dollars, not raw revenue, and why investors read gross margin alongside growth in the Rule of 40.
Frequently asked questions
What is a good gross margin for SaaS?
Pure-software SaaS is generally expected to run 75–85% gross margin. Anything below roughly 70% prompts questions about infrastructure cost, heavy support load, or a services-led model. Usage-based and infrastructure products legitimately run lower.
What is included in SaaS cost of revenue?
Hosting and cloud infrastructure, the customer support and success teams, payment processing fees, and third-party software or data delivered as part of the product. Sales, marketing, R&D, and corporate overhead are excluded — they fall below the gross-margin line.
Why use gross margin in LTV?
Because raw revenue overstates the value a customer actually contributes. Lifetime value should reflect the gross-margin dollars a customer generates, since only that portion is available to cover acquisition cost and fund growth.
Related metrics
Customer Lifetime Value (LTV)
Customer lifetime value (LTV) estimates the gross-margin revenue an average customer generates before churning. Learn the margin-adjusted LTV formula, the LTV:CAC ratio, and benchmarks.
Rule of 40
The Rule of 40 says a healthy SaaS company’s growth rate plus profit margin should equal at least 40%. Learn the formula, which margin to use, and how to read the score.
Average Revenue Per Account (ARPA)
ARPA (average revenue per account), also ARPU, is recurring revenue divided by number of accounts. Learn the formula, why it matters for pricing and LTV, and how to grow it.
LTV:CAC Ratio (LTV:CAC)
The LTV:CAC ratio compares the lifetime value of a customer to the cost of acquiring them. Learn the formula, the 3:1 rule of thumb, and what high or low ratios really mean.
Track this automatically
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Benchmarks are general SaaS ranges and vary by segment, stage and business model. Last reviewed 2026-05-30.