[GTM glossary](/glossary.md) Gross margin GTM Strategy & SaaS Metrics # Gross margin In short Gross margin is the share of revenue that remains after you subtract the cost of goods sold (COGS), expressed as a percentage. The formula is revenue minus COGS, divided by revenue. For SaaS, COGS typically includes hosting, third-party software costs, customer support, and onboarding staff directly tied to serving customers. Gross margin tells GTM teams how much each revenue dollar can fund sales, marketing, and profit. ## How to calculate gross margin Say a company earns 1,000,000 in subscription revenue in a year and spends 250,000 on hosting, support, and other costs of delivery. Gross profit is 750,000, so gross margin is 75 percent. These figures are only an example. * **Formula:** (Revenue minus COGS) divided by revenue, times 100. * **Gross profit:** Revenue minus COGS, in currency instead of percent. --- ## What counts as COGS in SaaS * **Usually included:** Cloud hosting, data and API costs, payment fees, support, and customer onboarding. * **Usually excluded:** Sales, marketing, and general administration, which sit below gross profit. * **Judgment calls:** Customer success and professional services allocation vary, so be consistent and document your approach. --- ## Why gross margin matters for GTM teams * **Pricing:** A low margin leaves little room for discounts. * **CAC tolerance:** Payback periods should use margin-adjusted revenue, since a dollar of revenue is not a dollar of profit. * **Product mix:** Services-heavy deals usually carry lower margin than pure software. * **Segment choice:** Some customers cost more to support. Compare margin by segment before scaling acquisition there. --- ## Gross margin vs. markup Gross margin is profit as a share of the selling price. Markup is profit as a share of cost. A product that costs 60 and sells for 100 has a 40 percent gross margin and a 66.7 percent markup. --- ## Common mistakes * Mixing up margin and markup when setting prices. * Leaving support or hosting out of COGS to look better. * Discounting heavily without checking the effect on margin. * Reporting one blended number and hiding weak segments. --- ## Gross margin FAQs **What is gross margin?** Gross margin is the percentage of revenue left after subtracting the direct cost of delivering your product or service. It is calculated as revenue minus cost of goods sold, divided by revenue, and shows what remains to cover other expenses. **How do you calculate gross margin?** Subtract cost of goods sold from revenue to get gross profit, divide gross profit by revenue, and multiply by 100. For example, revenue of 100 with direct costs of 30 gives a gross margin of 70 percent. **What is a good gross margin for SaaS?** There is no single number, since it depends on product, pricing, and how costs are classified. Software typically has higher margins than service-heavy businesses. Compare your own trend over time and by segment instead of relying on a universal target. **What is the difference between gross margin and net margin?** Gross margin only subtracts direct delivery costs from revenue. Net margin subtracts all expenses, including sales, marketing, administration, interest, and taxes. Gross margin shows delivery efficiency; net margin shows overall profitability. Share term --- ## More related phrases * [Gross revenue retention](/glossary/gross-revenue-retention.md) * [Annual recurring revenue](/glossary/annual-recurring-revenue.md) * [Average revenue per user](/glossary/average-revenue-per-user.md) ## Similar phrases * [Markup](/glossary/markup.md) Markup is the amount added to the cost of a product or service to arrive at its selling price, usually expressed as a percentage of cost, and it is not the same as margin. * [CAC payback period (CAC)](/glossary/cac-payback-period.md) CAC payback period is the number of months it takes for a customer's gross profit to repay the cost of acquiring them. * [Customer acquisition cost (CAC)](/glossary/customer-acquisition-cost.md) Customer acquisition cost (CAC) is the total sales and marketing spend needed to win one new customer, usually measured over a set period. * [Pricing strategy](/glossary/pricing-strategy.md) Pricing strategy is the approach a company uses to set prices and package its product, balancing customer value, competition, costs, and growth goals. * [Profit and loss (P&L)](/glossary/profit-and-loss.md) A profit and loss (P&L) statement summarizes revenue, costs, and expenses over a period to show whether a company made a profit or a loss.