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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.