Gross Margin
The percentage of revenue remaining after subtracting the direct cost of delivering your product or service — a measure of fundamental business efficiency.
What is Gross Margin?
Gross margin measures how much of every revenue dollar you keep after paying the direct costs of delivering your product. For a SaaS company, direct costs (COGS) typically include hosting/infrastructure, payment processing fees, and direct customer support.
Gross margin is expressed as a percentage: if your revenue is $100,000 and your COGS is $20,000, your gross margin is 80%. Software companies typically have high gross margins (70-90%) because the marginal cost of serving an additional customer is low.
Gross margin is different from net margin, which also subtracts operating expenses (payroll, marketing, rent, etc.). A company can have excellent gross margins but still lose money overall because of high operating expenses.
Why it matters
Gross margin reveals the fundamental economics of your business. A high gross margin (80%+) means most of your revenue is available to cover operating expenses and eventually generate profit. A low gross margin means you're spending heavily just to deliver your product.
Investors pay close attention to gross margin because it determines the unit economics ceiling. If your gross margin is 30%, you'll never have more than 30 cents of every dollar available for sales, marketing, and R&D — which severely limits scalability.
Formula
Gross Margin = (Revenue - COGS) / Revenue × 100 Gross Profit = Revenue - COGS
Example
Revenue: $60,000/month. COGS: hosting $4,000, payment processing $1,800, direct support $3,200 = $9,000 total. Gross profit = $51,000. Gross margin = $51,000 / $60,000 = 85%. This is strong for SaaS — industry benchmark is 70-85%.
How RunwayCal helps
RunwayCal computes gross margin as part of the P&L on the Financial Statements page. By separating COGS from operating expenses, you can see your true gross margin and track it over time.
Common mistakes
- 1Including operating expenses (like engineering salaries) in COGS, which deflates gross margin
- 2Not tracking gross margin over time — it can erode as you add infrastructure or support costs
- 3Comparing gross margins across different industries without context (SaaS vs hardware have very different profiles)
Track your gross margin alongside burn and runway
RunwayCal separates COGS from operating expenses in your P&L, so you see your true gross margin and how it trends over time.
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