What is Gross Margin?
Gross Margin is defined as the percent of revenue left over after the cost of servicing that revenue is taken into account. Gross Margin is directly tied to your company’s ability to spend to grow and achieve profitability. It is basically a reflection of how valuable every dollar of revenue is to the business.
How to calculate Gross Margin:
COGS[cost of goods sold]
Gross Margin is particularly useful because it informs directly how much a startup can spend to grow. Most VCs and SaaS experts suggest SaaS companies aim for a Gross Margin of about 80%.
At the very early stages of a startup, it can be challenging to calculate Gross Margin correctly mainly because it is difficult to estimate how much of each employee’s time is allocated to individual tasks. To improve Gross Margin, you have two options: increase revenue or decrease COGS. When you’re just starting out, your Gross Margin is likely to be low, but as you acquire more customers, they start to balance each one. As a result, your Gross Margin increases. At this point, it can be tempting to continue cutting costs and increasing prices, but you need to find the right balance so that customers still find value in your product.