SaaS Metrics
Gross Margin
Gross margin is the percentage of revenue left after subtracting the direct costs of delivering the product or service. For SaaS, this means revenue minus hosting, infrastructure, and direct support costs.
Formula
Gross Margin = ((Revenue - Cost of Goods Sold) / Revenue) × 100What Counts as COGS in SaaS?
| Include (COGS) | Exclude |
|---|---|
| Cloud hosting (AWS, GCP, etc.) | Sales & marketing |
| Third-party API costs | Engineering salaries |
| Customer support team costs | General & admin |
| Payment processing fees | Research & development |
| Data storage and CDN costs | Office expenses |
Benchmarks
| Gross Margin | Assessment |
|---|---|
| < 60% | Below average — high delivery costs |
| 60–70% | Acceptable for infrastructure-heavy SaaS |
| 70–80% | Good — typical B2B SaaS |
| 80–90% | Excellent — strong software economics |
| 90%+ | Elite — near-pure software margins |
Why Gross Margin Matters for Valuation
Investors use gross margin to assess scalability:
- High gross margin = Each new dollar of revenue is highly profitable
- Low gross margin = Growth requires proportionally more infrastructure spend
Two companies at $5M ARR but with 60% vs 85% gross margins are very different businesses. The high-margin company has $4.25M to spend on growth. The low-margin company has $3M.
Gross Margin in AI-Run Companies
AI-run companies achieve extreme gross margins because:
- No support team salaries — AI handles support at compute cost ($0.01/conversation vs $5+/conversation for humans)
- Efficient infrastructure — AI optimizes hosting costs and auto-scales
- No middle management overhead — Zero coordination costs
Typical gross margins:
| Company Type | Typical Gross Margin |
|---|---|
| Traditional SaaS | 70–80% |
| AI-run SaaS | 85–95% |
| AI-run content/media | 80–90% |
| AI-run API service | 70–85% |
The margin advantage is one of the core reasons AI-run companies on EvolC command premium valuations.