Gross Margin: Measuring the Health of Your Business Model

Gross Margin: Measuring the Health of Your Business Model

Gross Margin shows how efficiently you deliver value — the percentage of revenue left after paying for direct costs like hosting, support, and delivery.

It’s a simple but essential measure of scalability.

At a Glance

Formula:
Gross Margin = (Revenue – Cost of Goods Sold) ÷ Revenue

Benchmark Ranges:

• SaaS: 75–85%
• Marketplaces: 40–60%
• Services-heavy: 25–40%

Recommended Playbook: Financial Planning & Budgeting

1. Why it matters

Gross Margin determines how much room you have to invest in growth, R&D, and operations.
Higher margins = more flexibility.
Low margins = limited scalability.

Investors view gross margin as a proxy for operating leverage.

2. How to calculate

If your company earns $10M in revenue and spends $2M on hosting, support, and direct costs:

[Gross Margin](/glossary#gross-margin) = (10 – 2) ÷ 10 = 80%

3. Benchmarks by model

4. How to improve

• Optimise infrastructure costs (e.g., AWS, GCP).
• Automate support and onboarding.
• Review pricing relative to COGS.
• Shift from service-heavy to product-heavy delivery.

5. Common pitfalls

• Misclassifying overhead as COGS.
• Ignoring payment processing or support costs.
• Comparing across very different industries.

Gross margin is your economic engine — the higher it is, the more every sale compounds.

Track and optimise your margins using the Financial Planning & Budgeting.