Gross margin

Formula

(Revenue - COGS) / Revenue

Unit

%

Models

All models

What it is

Gross margin measures the percentage of revenue left after subtracting the direct costs of goods sold (COGS). The formula is (Revenue − COGS) / Revenue. It is the foundation on which all operating expenses must be covered, and it differs widely by business model.

How to calculate it

Subtract COGS — hosting, payment processing, manufacturing, content acquisition, or cost of materials, depending on the model — from total revenue, then divide by revenue. For marketplaces the convention is to use net revenue (the take rate) as the denominator, which lifts reported margins to 80–90%. Always clarify whether revenue is gross or net before comparing.

Why it matters

Gross margin sets the ceiling for long-run profitability. A SaaS business at 70–85% has room to invest heavily in sales and R&D; a hardware or DTC business at 30–50% must run leaner on every subsequent line. Investors use gross margin as a proxy for business quality and pricing power.

Benchmarks & pitfalls

Based on KBCM/Sapphire 2024, Damodaran, Tunguz, and SeriesOps benchmarks: SaaS typically runs 70–85%; marketplace 80–90% on net revenue; ecommerce/DTC and subscription 30–50%; media 35–50%; usage-based (e.g. Twilio ~50%, Snowflake ~75% product gross margin) 50–80%; fintech software 80%+ (but lending businesses should use NIM instead of traditional gross margin); hardware 40–60% (Apple ~37%, Cisco ~65%). The key pitfall is inconsistent COGS definitions — some companies exclude hosting, stock-based compensation, or amortization, inflating reported margins. For fintech lending, gross margin is the wrong metric entirely; net interest margin is the correct analog.