The total sales minus the cost of goods sold (COGS). While the average for SaaS costs is 71%, this figure may vary in different industries, and it’s crucial to understand gross margin, especially in transaction revenue businesses.

Gross Margin, also sometimes referred to as Gross Profit Margin, is a financial metric used to assess a company’s profitability. It essentially measures the amount of profit a company makes after accounting for the direct costs of producing its goods or services [1, 2].

Here’s a deeper look at Gross Margin:

Formula and Calculation:

  • Gross Margin is typically expressed as a percentage and calculated using the following formula:
Gross Margin = (Revenue - Cost of Goods Sold (COGS)) / Revenue x 100%
  • Revenue: This represents the total sales income generated by the company.
  • Cost of Goods Sold (COGS): This includes the direct costs associated with producing the goods or services sold, such as raw materials, labor, and direct overhead expenses.


  • A higher Gross Margin generally indicates a more efficient business operation. It signifies that the company is able to retain a larger portion of its revenue after covering the direct costs of production [2].
  • A lower Gross Margin, while not necessarily a bad sign, might warrant further investigation. It could indicate factors like high production costs, competitive pricing pressures, or inefficiencies in the production process [3].


  • Gross Margin is a valuable metric for various stakeholders, including:
    • Investors: It helps them assess a company’s profitability and pricing strategy.
    • Creditors: They consider Gross Margin when evaluating a company’s ability to repay loans.
    • Management: It can be used to identify areas for cost reduction and improve overall operational efficiency.


  • Gross Margin provides a high-level view of profitability and doesn’t consider indirect expenses like marketing, administrative costs, or interest payments.
  • It can be influenced by factors beyond a company’s control, such as fluctuations in raw material prices [4].

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