Unit Economics

Gross Margin: Revenue minus Cost of Goods Sold, as a percentage of revenue

The percentage of revenue left after the direct costs of delivering the product.

Definition

Gross margin is the percentage of revenue left after subtracting the direct costs of delivering the product or service (cost of goods sold). For software businesses this includes hosting, customer support cost, third-party data and infrastructure. For services businesses it includes delivery team costs.

Formula

Gross Margin = (Revenue − Cost of Goods Sold) ÷ Revenue × 100

Gross Margin % = (Revenue − COGS) / Revenue × 100

Worked example

£100,000 revenue with £25,000 cost of delivery gives 75% gross margin. SaaS businesses typically run at 70-85% GM; consulting and services at 30-55%; marketplaces at 55-75%.

Why it matters

Gross margin determines how much revenue is available to fund everything else (sales, marketing, R&D, G&A and profit). It is the upstream lever that makes every downstream unit economic possible. Two SaaS businesses at the same ARR but with 50% vs 80% GM look completely different to a board.

Common mistakes

  • Excluding customer support cost from COGS (it belongs there for SaaS)
  • Confusing gross margin with contribution margin (which deducts variable selling costs)
  • Comparing gross margin across business models without adjustment

Related terms

CAC PaybackLTVRule of 40

Read more in The Guide

Chapter: Understanding the P&L →

Sources & further reading

  • — Drawn from Evara's working definitions used on retained search and revenue advisory engagements (2024–2026).
  • — Reconciled against industry conventions in SaaStr, OpenView SaaS Benchmarks and Bessemer State of the Cloud.
  • — Reviewed by Rich Evans, Strategic Advisor at Evara and former operator/founder.

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