Gross Margin: Calculation, Benchmarks & Improvement Guide

Definition

Gross margin measures the profitability of a company’s products or services. Take gross profit divided by revenue and express the result as a percentage.

It shows how much profit is left from each dollar of net revenue to cover overheads, sales and R&D, which makes it one of the clearest indicators of pricing power and long-term efficiency.

Also known as: gross profit margin · gross margin percentage · GM% · product margin.

How is gross margin calculated?

Gross margin is calculated by subtracting the cost of goods sold (COGS) from revenue, and then dividing that number by revenue. It is typically expressed as a percentage.

ScaleXPGross
Margin
%=Revenue(£,€,$)−Direct Cost(£,€,$)

---

Revenue(£,€,$)x 100

In ScaleXP this is calculated automatically from your accounting and CRM data.

Direct costs are the expenses that can be attributed to delivering the product — server hosting, development, support and payment fees. Indirect costs, such as office rent, marketing and general salaries, sit below the line and do not belong in the calculation.

Worked example

Line	Amount
Annual revenue	$2,000,000
Cost of goods sold (hosting, support, payment fees)	$400,000
Gross profit	$1,600,000
Gross margin = $1,600,000 ÷ $2,000,000 × 100	80%

To work out your own, use the calculator below.

Try it with your numbers

How is gross margin used by SaaS companies?

In the case of SaaS companies, gross margin is used to measure profitability. It is important because it shows how much of the revenue is being spent on direct costs, such as hosting and development, and how much is left over to cover indirect costs, such as marketing and overhead.

The arithmetic is never the hard part. The judgment is deciding which costs belong above the line. Move the onboarding team out of cost of goods sold and the same business reports 78%; move a share of engineering in and it reports 66%. Nothing changed except the definition, which is why comparing your figure to a benchmark is only meaningful when both sides count the same costs.

What is a good result?

A good gross margin varies by industry and company, but generally a higher gross margin is considered better. For SaaS companies, a gross margin of 70% or higher is considered good.

Gross margin, contribution margin and net margin are not the same thing. Gross margin stops at the direct cost of delivering the service. Contribution margin goes further and subtracts the variable cost of winning the customer. Net margin subtracts everything else, including overheads, R&D and tax. A SaaS company can comfortably run a 75% gross margin and still post a net loss while it invests in growth.

What are the gross margin benchmarks?

Definitions of gross margin vary, which makes cross-company comparison harder than it looks. What one business puts in cost of sales, another puts in operating costs. The figures below use a consistent definition across 342 B2B SaaS companies, which is what makes them comparable.

The median software gross margin is 80%. Blended, including services, it is 76%. The top quartile runs at 86% or higher and the bottom quartile at 50%.

Source: 2026 Aleph × Benchmarkit SaaS & AI Performance Benchmarks, published June 1, 2026, full-year 2025 actuals from 342 B2B SaaS and AI-native companies (228 to 232 reported gross margin).

Everyone expected AI infrastructure to crush software margins. It has not happened at the median — software gross margin has held between 79% and 81% for four consecutive years, including through the AI build-out. Where it does show up is pricing model: companies on usage-only pricing sit at 62%, well below the 80% median, because infrastructure cost scales with what customers consume.

Gross margin by company size

ARR band	Median software gross margin
Under $5M	72%
$50M – $100M	86%

A 14-point expansion between the two, almost entirely operational leverage. Early-stage margin is low because fixed infrastructure and support costs are spread across too little revenue, not because the product is inefficient.

Why blended margin is lower

Software margin is 80%. Total revenue margin is 76%. That four-point gap is professional services and other non-recurring revenue diluting the blend.

If you report a single blended figure and your services mix is growing, margin will appear to fall even when the software itself is improving. Reporting the two separately is the fix.

How your result compares

Your result

72% gross margin

That is below the 2026 median of 80% for software. The top quartile runs at 86% or higher.

40%50% · bottom quartile80% · median86% · top quartile

Change your numbers

One number against one benchmark only tells you so much. The 2026 benchmark report has the median and top-quartile figures for all 20 metrics, so you can see where the rest of the business sits.

What pulls SaaS gross margin down

Five costs account for most of the erosion:

• Hosting and infrastructure that scales with usage rather than with price.
• Customer support that grows headcount in step with customer numbers.
• Onboarding and professional services delivered at or below cost to win deals.
• Third-party API and data costs embedded in the product.
• Payment processing, typically 1.5% to 3% of revenue.

The pattern worth watching is any cost that rises in step with customer count. A margin that drifts downward as the business grows usually means delivery has not been automated at the same rate as sales.

How ScaleXP calculates gross margin

ScaleXP calculates gross margin automatically from your accounting data. Revenue and cost of goods sold come from Xero, QuickBooks or Zoho Books, mapped to the accounts you choose, and the figure is recalculated as each month closes. Software and services can be reported separately, so a growing services mix never quietly masks the software margin, and every figure traces back to the underlying ledger.