Gross Margin

Gross margin is the share of revenue left after subtracting the direct cost of delivering your product - your cost of goods sold (COGS). For SaaS that COGS is mostly cloud hosting, third-party APIs and infrastructure, payment-processing fees, and the customer-support and success staff needed to keep accounts running. The formula is (revenue - COGS) / revenue. Healthy pure-software SaaS lands around 75-85%; anything materially lower usually means expensive infrastructure, heavy human-in-the-loop support, or resold third-party costs eating the model. Gross margin matters because it's the money actually available to fund sales, R&D, and profit - two companies with identical ARR but 80% vs 55% margins are completely different businesses. It's also why AI features deserve scrutiny: per-token model costs are variable COGS that can quietly compress margin as usage grows. Track gross margin per product line, watch it as you scale, and design pricing so heavy users don't turn your best customers into your least profitable ones.