For SaaS founders, gross profit isn’t just an accounting metric—it’s one of the clearest signals that your business model actually works. If you don’t have the margin to fund product development, support and growth, you’ll never build a sustainable company.
Let’s break down how to calculate gross profit the right way for SaaS, what to include (and exclude) in your cost of goods sold (COGS), and how to use gross margin as a strategic tool—not just a financial output.
What Is Gross Profit for a SaaS Business?
At its core, gross profit is your revenue minus the cost of delivering your product. In a SaaS company, that means:
Gross Profit = Revenue – COGS
Unlike a physical product, SaaS COGS typically includes things like:
- Hosting and infrastructure costs
- Third-party tools required to deliver the service
- Customer support tied to the product experience
- Credit card and payment processing fees
It should not include expenses related to marketing, sales or R&D. The goal is to isolate the cost of delivering the product as-is, so you can understand how much margin you have left to run the rest of the business.
Gross margin is your gross profit as a percentage of revenue:
Gross Margin (%) = (Gross Profit / Revenue) x 100
A Quick Example
If your product costs $10/month to deliver per user, and you’re charging $40/month, your gross profit is $30 and your gross margin is 75%:
Gross Margin = ($40 – $10) / $40 = 75%
This isn’t just an accounting formula—it’s a foundational input for pricing, positioning and business model design.
Why Gross Margin Matters More Than You Think
Gross margin sets the floor for what you can afford to spend on everything else: engineering, customer acquisition, retention and yes—profit. If you don’t have enough left over after covering COGS, your path to growth gets a lot more expensive or even impossible.
It also helps define your strategic options. A company with 80% margins can invest more in growth or absorb higher churn than one with 40% margins. That flexibility compounds over time.
What’s a Good Gross Margin Target for SaaS?
Gross margins vary widely in SaaS, but here are some rough benchmarks:
- Pre-revenue / Early Stage: Gross margin might be lower, in the 40–60% range, as you’re still refining infrastructure and support costs. Investors will look for a path to 70%+.
- Mid-Stage SaaS (ARR $1–10M): Target 65–75%. Your systems should be stabilizing and you’ll need that margin to fund sales and marketing.
- Later Stage / Scaling (ARR $10M+): You should be pushing 75–85% margins. This is where strong SaaS businesses start throwing off cash and funding growth from operations.
You can also compare across business models:
| Business Type | Gross Margin Benchmarks |
|---|---|
| Horizontal SaaS | 75–85% |
| Vertical SaaS | 65–75% |
| Services-heavy SaaS | 40–60% |
| E-commerce | 30–50% |
Real-World Gross Margins from Public SaaS Companies
For context, here are gross margins from several leading public SaaS companies as of 2023:
| Company | Gross Margin |
|---|---|
| Adobe | 88% |
| Salesforce | 74% |
| Shopify | 49% |
| Zoom | 75% |
| HubSpot | 82% |
While their customer segments and go-to-market motions differ, they all share a focus on keeping product delivery lean—allowing them to reinvest heavily in growth and customer experience.
Common Margin Killers
If your gross margin isn’t where it needs to be, these are usually the culprits:
1. Excessive Support Costs
Live chat, onboarding specialists and hands-on training can all drive up COGS if they’re not scalable.
2. Expensive Third-Party Tools
Relying heavily on paid APIs or infrastructure (like video, AI or payments) can eat into your margin fast.
3. Cloud Cost Creep
Overprovisioned servers, inefficient queries or lack of cost monitoring can inflate hosting expenses.
4. Discounting or Low Prices
Underpricing may create a healthy conversion rate, but it also gives you far less room to fund growth.
Use Gross Margin to Price Smarter
One of the most practical uses for gross margin is to back into a pricing floor:
Price = COGS / Target Gross Margin
So if your cost to serve is $12 and your margin goal is 75%, your minimum viable price is $48. That doesn’t mean you have to charge $48—but anything less, and you’re capping your ability to invest in growth.
Pricing decisions should never be made in isolation from your costs. Use margin targets to set a floor, then validate willingness to pay and perceived value to find the ceiling.
Final Thought
Gross profit isn’t just a number your accountant cares about—it’s the core constraint that defines how ambitious your SaaS business can be. Understand it, track it and optimize it. Because if your margins are strong, your strategy has room to grow.
Sources and Additional Reading
- Bessemer Venture Partners – 6C’s of SaaS Finance
- KeyBanc Capital Markets – Annual SaaS Survey
- SaaStr – Why Gross Margin Matters
- a16z – Guide to SaaS Metrics
- SEC Filings for Adobe, Salesforce, Shopify, Zoom and HubSpot
