What Is Gross Margin for SaaS?
The profitability metric that reveals whether your revenue actually turns into cash — computed by merging subscription revenue with banking expenses.
Definition
Gross Margin is the percentage of revenue remaining after subtracting the cost of goods sold (COGS). For SaaS companies, COGS typically includes hosting infrastructure, API costs, payment processing fees, and customer support costs directly tied to service delivery.
Varsal computes gross margin by combining MRR from RevenueCat with categorized expenses from your connected bank account. This cross-source calculation gives you a real-time view that would otherwise require manual spreadsheet work.
Track this metric live in your dashboard →How It Is Calculated
Gross Margin = ((MRR - COGS) ÷ MRR) × 100
Varsal automatically identifies COGS-related expenses from your banking data by looking at categories like AI/API costs, infrastructure spending, and banking/processing fees. For example, if your MRR is $24,800 and your COGS expenses total $4,960, your gross margin is 80%.
Track this metric live in your dashboard →Why It Matters
Gross margin is the foundation of SaaS unit economics. It determines how much of each revenue dollar is available for growth, sales, R&D, and profit. A company with 80% gross margin has four times more margin to invest in growth than one with 20%.
Investors scrutinize gross margin because it reveals the scalability of the business model. Software should have high gross margins because the marginal cost of serving an additional customer is near zero. Declining gross margin suggests structural problems with cost management.
Benchmarks
Best-in-class SaaS companies achieve 75-85% gross margins. The median public SaaS company operates at approximately 72%. Below 60% signals that infrastructure costs or third-party dependencies are eating into margins.
AI-powered products often face pressure on gross margins due to inference costs. If you rely heavily on LLM APIs, monitor this metric closely as you scale — API costs can grow faster than revenue if not managed carefully.
How to Improve
Negotiate volume discounts with infrastructure providers as you scale. Moving from pay-as-you-go to committed-use pricing on cloud services can reduce hosting costs by 30-60%.
Optimize API usage by caching, batching, and using smaller models where appropriate. If AI inference is a significant cost, consider when to use expensive models versus cheaper alternatives.
Review payment processing costs. Stripe takes 2.9% + $0.30 per transaction, but negotiated enterprise rates can bring this below 2% at scale. Annual billing also reduces per-transaction costs.
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