Gross Margin: The Economics Behind Your Growth
Gross margin determines how much of every dollar you keep to fund growth. It's the clearest signal of whether your business model can scale.
| Model | Seed | Series A | Series B | Top quartile |
|---|---|---|---|---|
| B2B SaaS | 60-70% | 65-75% | 70-80% | 75%+ |
| Consumer | 50-65% | 55-70% | 60-75% | 65%+ |
Gross margin is the percentage of revenue remaining after subtracting the direct costs of delivering your product. For software companies, this is primarily hosting, infrastructure, and customer support costs. It's the foundation of your unit economics and determines how much capital you have to reinvest in growth.
What It Is
Gross Margin = ((Revenue - Cost of Goods Sold) / Revenue) x 100. For SaaS companies, COGS includes hosting/infrastructure costs, third-party software fees baked into the product, customer support and onboarding staff costs, and payment processing fees.
Why It Matters
Gross margin directly determines your ability to invest in sales, marketing, and R&D. A B2B SaaS company with 80% gross margins can spend aggressively on acquisition while remaining path-to-profitable. A marketplace with 40% margins needs to be far more capital-efficient. Investors use gross margin as a proxy for scalability — high margins mean the incremental cost of serving each new customer approaches zero.
How to Calculate It
Be honest about what goes into COGS. Many startups undercount by excluding DevOps salaries or customer success costs. Include everything directly tied to delivering and supporting the product. Exclude R&D, sales, marketing, and G&A — those go below the gross margin line.
Startup Anecdote
When Dropbox was scaling, their biggest gross margin threat was AWS costs. At one point, hosting was eating over 30% of revenue. Drew Houston made the controversial decision to build their own infrastructure ("Magic Pocket"), spending hundreds of millions upfront. It took years, but it pushed their gross margin from the mid-60s to over 75%, fundamentally changing the economics of the business and enabling the path to profitability.
Key Takeaway
Gross margin is destiny for SaaS. Aim for 70%+ in B2B and 60%+ in B2C. If your margins are below these thresholds, audit your infrastructure costs and pricing before scaling acquisition spend — growing a low-margin business faster just burns cash faster.