Formula
gross margin = (revenue − cost of revenue) / revenue
Gross margin
Gross margin is the percentage of revenue left after the direct costs of delivering the product.
Worked example
€40,000 of monthly revenue with €9,200 of hosting, support and payment-processing costs is a gross margin of 77 percent.
Benchmark
Software businesses typically run 70 to 85 percent. Services and hardware run considerably lower.
All startup finance benchmarks →Gross margin decides how much of each euro of revenue is available for everything else: sales, engineering, and eventually profit.
It also belongs inside lifetime value. Computing LTV on revenue rather than gross profit overstates what a customer is worth, often by a third or more.
It is not the same as contribution margin: gross margin looks at the product as a whole and subtracts only the cost of delivering it, while contribution margin follows a single sale and subtracts everything that varies with it, commissions and payment fees included.
In support- and service-heavy businesses, most of the cost of revenue is people, so the margin depends on fully loaded employee cost — salary plus employer taxes, benefits and equipment — rather than the payslip figure. Costing delivery headcount at base salary alone overstates gross margin by several points.
Common questions
How do you calculate gross margin?
Subtract the cost of revenue from revenue, then divide by revenue. For software, cost of revenue means hosting, third-party services in the product, support and payment fees. €50,000 of revenue with €9,000 of delivery costs is an 82 percent gross margin.
What is a good gross margin for SaaS?
70 to 85 percent is the normal range for software, and investors read anything below 70 as a sign the product carries hidden service or infrastructure weight. Services businesses typically run 30 to 50 percent, and hardware lower still, so cross-industry comparisons mislead.
What is the difference between gross margin and net margin?
Gross margin subtracts only the direct costs of delivering the product. Net margin subtracts everything else too: salaries, rent, marketing, tax. A company can hold an 80 percent gross margin and a deeply negative net margin, which is the standard shape of a growing startup.
Keep this number live
Plainhub computes gross margin from money you record in plain words, so it is current when you need it rather than the night before a board meeting.
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