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What is Gross Margin?
Gross Margin is a financial metric that measures the profitability of a company’s products or services.
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.
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How is Gross Margin used by SaaS companies, and why does it matter?
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.
What is the difference between direct and indirect costs?
Direct costs are expenses that can be directly attributed to the production of a product or service, while indirect costs are expenses that cannot be directly attributed to the production of a product or service. Examples of direct costs for SaaS companies include server hosting and development costs, while examples of indirect costs include office rent, salaries, and marketing expenses.
What is a good Gross Margin %?
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.
What are the Gross Margin benchmarks?
The precise definition of Gross Margin can vary widely. As such, it is difficult to find directly comparable benchmarks. The best comparisons are to a company’s own performance, over the last several months, quarters, or years. SaaS companies do have higher gross margins than companies in other industries because their costs of goods sold are relatively low.
Gross Margin Visualisation Example
ScaleXP fully automates all standard SaaS KPIs, including Gross Margin. Definitions are easy to customise, providing not only a total gross margin but a clear breakdown by product. With integrations to all major accounting systems, the ScaleXP platform allows instant visualisation of all your data and KPIs, as well as automated revenue recognition and analysis.
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MRR
Predictable revenue that a company can expect to receive on a monthly basis from its subscription-based products or services.
ARR
Predictable revenue that a company can expect to receive on an annual basis from its subscription-based products or services.
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