How to Calculate SaaS Gross Margin Percentage
Gross Margin Percentage measures the proportion of total revenue remaining after deducting direct production expenses or software Cost of Goods Sold (COGS). For software companies, healthy gross margins typically fall between 75% and 85%.
High gross margins provide the cash flow capacity needed to invest heavily in customer acquisition, engineering talent, and product expansion.
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The Gross Margin Percentage Formula
Gross margin percentage is computed by subtracting COGS from total revenue and dividing by total revenue:
Let us walk through a practical calculation:
- Total Revenue: $100,000.00
- Direct COGS (Hosting, APIs, Support): $20,000.00
- Gross Profit: $100,000 - $20,000 = $80,000.00
- Gross Margin Percentage: ($80,000 / $100,000) x 100 = 80.00%
Markup vs Gross Margin Formula
While gross margin measures profit relative to total revenue, markup measures profit relative to COGS:
Markup % = (Gross Profit / COGS) x 100
With $80,000 gross profit and $20,000 COGS: ($80,000 / $20,000) x 100 = 400.00% Markup.
Calculate your company's margin numbers using our free Gross Margin Calculator.
