Gross margin is the percentage of revenue that remains after deducting the direct
costs of delivering your product or service. It's the most fundamental profitability
metric — before operating expenses, sales, marketing, or overhead.
Gross Margin % = (Revenue − COGS) ÷ Revenue × 100
Gross Profit = Revenue − COGS
Margin vs markup — the common confusion
Gross margin and markup are both derived from revenue and COGS, but they're calculated
differently and tell you different things:
Metric
Formula
What it measures
Gross margin
(Revenue − COGS) ÷ Revenue
% of revenue retained after direct costs
Markup
(Revenue − COGS) ÷ COGS
% added to cost to set price
A 50% gross margin means you keep 50 cents of every dollar earned.
A 50% markup means you added 50% to cost to set your price — which is only a 33% margin.
At a 50% margin: sell for $100, COGS = $50, markup = $50/$50 = 100%
At a 50% markup: sell for $150, COGS = $100, margin = $50/$150 = 33%
Gross margin benchmarks by industry
Industry
Typical gross margin
SaaS / software
70–85%
Professional services
50–70%
E-commerce (branded)
40–60%
E-commerce (reseller)
20–40%
Physical product (DTC)
40–65%
Restaurants / food
60–70% (on food cost only)
Wholesale / distribution
10–30%
Why gross margin is the most important metric at early stage
Gross margin determines whether your business model works. Operating expenses —
headcount, rent, marketing — are variable costs you control. Gross margin is structural.
A business with 20% gross margin can't reach 20% net margin even at infinite scale.
What is COGS for a SaaS business?
For SaaS, COGS includes:
- Cloud infrastructure (AWS/GCP/Azure costs that scale with customers)
- Third-party API costs (Twilio, Stripe, etc.)
- Customer support headcount (fully loaded)
- Customer success management (partially)
- Data storage and CDN costs
COGS does NOT include: R&D, engineering salaries, sales, marketing, G&A, or any
overhead. Those are operating expenses below the gross margin line.
Frequently asked questions
What is a good gross margin for SaaS?
70–80% is the benchmark for most SaaS businesses. Below 60%, you may have a managed
service or implementation cost issue. Above 85% is possible for pure-software PLG (product-led growth)
companies with low support costs. Public SaaS companies at IPO typically show 70–80%.
What does this calculator do?
Calculate gross margin %, gross profit, markup %, and the revenue needed at current COGS to hit any target margin.
A clear explanation of gross margin vs markup with formulas, examples, and a conversion table — so you never confuse them again.
Gross margin and markup are two different ways to express the same relationship
between price and cost. Confusing them is one of the most common financial mistakes
in small business — it can cause you to underprice by 30–50%.
The formulas
Gross Margin % = (Price − Cost) ÷ Price × 100
Markup % = (Price − Cost) ÷ Cost × 100
Both use the same gross profit number ($Price − $Cost). The difference is the denominator.
The critical distinction
If your margin is 50%: you keep 50 cents of every dollar earned.
If your markup is 50%: you added 50 cents to every dollar of cost — which is only a 33% margin.
This is where founders get into trouble. If you target "50% margin" but accidentally
use the markup formula, your actual margin is only 33%.
Conversion table: margin to markup
Gross Margin
Equivalent Markup
10%
11.1%
20%
25.0%
30%
42.9%
40%
66.7%
50%
100.0%
60%
150.0%
70%
233.3%
80%
400.0%
Conversion formulas
Margin to Markup: Markup = Margin ÷ (1 − Margin)
Markup to Margin: Margin = Markup ÷ (1 + Markup)
Which to use when
Use gross margin when: reporting to investors, modeling unit economics, comparing
to industry benchmarks, calculating LTV, or thinking about profitability as a percentage
of revenue.
Use markup when: setting wholesale prices (common in retail), calculating the
price from a known cost target, or communicating pricing to distributors.
SaaS companies almost always use gross margin. Physical product and retail businesses
often use both. Use the Gross Margin Calculator to
see both simultaneously for any revenue/COGS combination.
SaaS Gross Margin Benchmarks: What's Typical at Each Stage?
Industry benchmarks for SaaS gross margin by ARR stage, business model, and segment — with what goes into COGS and how to improve it.
Gross margin in SaaS is more nuanced than in physical product businesses. Unlike
manufacturing, there's no per-unit material cost — but there are hosting costs,
support costs, and third-party API fees that scale with customers and must be
included in COGS.
SaaS gross margin by ARR stage
ARR
Typical range
Notes
< $1M
55–75%
Often high support COGS early on
$1M–$5M
65–80%
Improving with product maturity
$5M–$20M
70–82%
Economies of scale in infrastructure
$20M–$100M
72–85%
Optimized infrastructure + support automation
$100M+
75–87%
Fully optimized, often offshored support
Why gross margin improves with scale
Infrastructure costs have natural step-function scaling. You over-provision
early, then use capacity without proportional cost increases.
Support costs spread over more customers. A support rep who handles 50 tickets/day
serves more customers as the user base grows and the product matures.
Third-party API costs often have volume discounts at scale.
Public SaaS gross margin benchmarks
Most public SaaS companies report 70–80% gross margin. Notable exceptions:
High-margin PLG companies (e.g., Figma, Notion): 80–87%. Low support, high
self-service, no COGS from customer success.
Managed service / implementation-heavy SaaS: 55–70%. High human labor in COGS.
A practical guide to what counts as Cost of Goods Sold in SaaS — what to include, what to exclude, and how to calculate COGS for your gross margin.
COGS (Cost of Goods Sold) for SaaS is the set of direct costs incurred to deliver
your software service to customers. Unlike physical products, there's no per-unit
material cost — but COGS still exists and significantly affects gross margin.
Getting COGS right matters because it determines your gross margin, which is how
investors, acquirers, and benchmarks evaluate your business model quality.
What to include in SaaS COGS
Cloud infrastructure: AWS, GCP, or Azure compute, storage, and network costs
that scale with your customer base or usage. This is the largest COGS item for
most SaaS companies.
Third-party APIs: Twilio (SMS, voice), Stripe (payment processing fees that
you pay but don't charge back), SendGrid, Cloudflare, and similar per-use costs.
Customer support: fully loaded cost of support engineers and tier-1 support
agents. This includes salary, benefits, equipment, and management overhead.
Customer success management: a portion (typically 50–75%) of customer success
salaries, depending on whether they're primarily onboarding (COGS) or upselling (sales).
Data and content costs: licensed data, third-party datasets, or content that's
integral to your product delivery.
What NOT to include in SaaS COGS
Engineering / R&D (building new features is R&D, not delivery)
Sales team salaries (below the gross margin line as sales expense)
Tools our audience uses alongside this calculator.
BaremetricsSaaS Analytics
Tracks gross margin, MRR, COGS, and 30+ SaaS metrics automatically from Stripe. See gross margin trends by cohort, plan, and geography without building spreadsheets.
Strategic finance platform for SaaS. Connects to your accounting system, CRM, and billing to model gross margin by product line, customer segment, and scenario.