Definition
For SaaS, cost of revenue usually includes hosting, third-party software embedded in the product, payment processing, customer support and onboarding staff. Where you draw that line changes the number, so write the policy down.
Formula
Gross marginGross margin % = (Revenue − Cost of revenue) ÷ Revenue
Example
Demo Co’s October gross margin was 78.4%.
Benchmarks
Subscription software typically runs 75% to 80% or higher. Services-heavy revenue pulls it down; report subscription and services margins separately.
Common mistakes
- Leaving support and hosting in operating expenses to flatter margin.
- Blending services revenue into subscription margin.
Examples use Demo Co, a fictional $3M ARR SaaS company, or a generic company where noted. Benchmarks are common reference points, not targets for every business.