SaaS Gross Margin

Gross margin is revenue minus the cost of delivering the service — hosting, third-party infrastructure, support, customer success for served accounts, DevOps — divided by revenue. Software's structural advantage is that this number can reach 75–85%, which is precisely why SaaS revenue commands the multiples it does.

It is also the quiet multiplier inside every unit-economics metric: LTV is margin-adjusted, CAC payback is repaid out of margin, and the profitability half of Rule of 40 rests on it. A business at 60% margin needs a quarter more revenue than one at 80% to fund the same operation — the gap compounds through every downstream number.

Subtract cost of revenue from revenue, divide by revenue. The judgement is in what counts as cost of revenue: hosting and infrastructure clearly, support and the share of customer success that serves existing accounts usually, and for AI-heavy products, inference costs — the line item currently dragging many otherwise-healthy margins below 70%.

In the running example, $200 of monthly revenue carries $50 of serving cost — a 75% gross margin, which is what turns $200 a month over 40 months into a $6,000 LTV rather than an $8,000 mirage.

Above 80% is best-in-class, 70–80% is the healthy core of SaaS, and below 70% earns questions: heavy services revenue, un-negotiated infrastructure, or AI inference costs passed through unpriced. Public-market investors visibly discount subscription revenue below roughly 70% — it prices like software but delivers like services.

Margins normally improve with scale as infrastructure amortises and support gets leverage. A gross margin that degrades as you grow is the anomaly worth investigating — it usually means each new customer costs more to serve than the last, and the growth story is quietly turning into a services story.