Profitability
Gross Margin
Revenue minus cost of goods sold, expressed as a percentage — how much of each dollar is left after direct delivery costs.
Gross margin = (Revenue − COGS) ÷ Revenue. It answers one question: after paying the direct costs of delivering what you sold, how much does each dollar of revenue retain? Everything below the gross profit line — salaries, marketing, rent, tools — has to be funded from that remainder, which is why margin is the first number investors use to judge whether a business model can scale.
Gross margin is also the most sensitive early-warning signal on the P&L. It moves when your costs change (cloud bills, component prices, payment fees) or your pricing changes (discounting, mix shift toward smaller customers). A slow decline of a few points a quarter rarely announces itself as a crisis — it just quietly erodes the funding available for growth until the model stops working.
Example
You bill $500,000 this quarter. Direct costs — hosting, payment processing, support tooling tied to delivery — total $150,000. Gross profit is $350,000 and gross margin is 70%. That $350,000 is what's available to cover payroll, marketing, and everything else.
Common questions
What is a good gross margin?
It varies by model: 70–85% is typical for SaaS, 40–60% for e-commerce with physical goods, 30–50% for services. The more useful question is the trend — margin stable or expanding as you scale is healthy; steady compression means costs or pricing are drifting the wrong way.
How is gross margin different from profit margin?
Gross margin stops after direct delivery costs (revenue minus COGS). Net profit margin is what remains after every single expense — COGS, operating expenses, interest, taxes. Gross margin measures unit economics; net margin measures the whole business's bottom line.
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