Gross Margin
Gross margin is revenue minus the direct cost of delivering the service (hosting, support, third-party licences, DevOps), expressed as a percentage of revenue. Healthy pure-software SaaS runs 75–85%.
Formula
Worked example
$500k quarterly revenue with $95k of hosting, support and per-seat licence costs is an 81% gross margin — $405k left to fund S&M, R&D and overheads.
Gross margin is the multiplier behind most unit economics: LTV, CAC payback and Rule of 40 margins all flow through it. A product at 60% margin must retain customers a third longer than an 80%-margin rival to reach the same LTV.
SaaS-specific costs that belong in COGS and are often mis-filed: customer support (not success/upsell), infrastructure, embedded third-party APIs priced per use, and professional-services delivery. Salespeople and engineers building the product do not belong there.
Compute it: LTV calculator (margin-adjusted)