Why use this calculator
Gross margin is a key health indicator for SaaS businesses. It reveals how efficiently you deliver your product and how much revenue is available to fund growth, R&D, and operations. Investors closely scrutinize gross margins because they indicate scalability. Higher gross margins mean more dollars available for sales, marketing, and product development per dollar of revenue earned. Understanding your COGS breakdown helps you identify cost optimization opportunities.
How to use it
Enter your Monthly Recurring Revenue (MRR) and break down your cost of goods sold into hosting and infrastructure, customer support, and third-party software costs. The calculator computes your COGS, gross profit, gross margin percentage, and annualized figures.
The formula
COGS = Hosting Costs + Support Costs + Third-Party Costs. Gross Profit = MRR - COGS. Gross Margin = (Gross Profit / MRR) x 100%. ARR = MRR x 12.
Worked examples
SaaS company with $100K MRR, $8K hosting, $15K support, $5K third-party costs
COGS of $28K, gross profit of $72K, and 72% gross margin
Early-stage SaaS with $30K MRR, $5K hosting, $10K support, $3K third-party costs
COGS of $18K, gross profit of $12K, and 40% gross margin indicating a need to optimize
When people use it
- Benchmarking gross margin against SaaS industry standards
- Identifying which COGS components are growing disproportionately
- Preparing financial metrics for investor presentations
- Evaluating the impact of infrastructure cost optimization initiatives
Tips
- Best-in-class SaaS companies achieve gross margins of 75-85%; below 60% may indicate infrastructure or support cost issues
- Customer support costs often grow slower than revenue as you build self-service resources and knowledge bases
- Negotiate volume discounts with hosting providers as you scale, and consider reserved instances over on-demand pricing
- Include only costs directly tied to service delivery in COGS; sales, marketing, and R&D belong in operating expenses
Questions people ask
- What is a good gross margin for SaaS?
- Top-performing SaaS companies typically achieve gross margins of 75-85%. Margins between 60-75% are acceptable for earlier-stage companies. Below 60% suggests the cost structure may not be sustainable at scale and should be addressed before aggressive growth spending.
- What should be included in SaaS COGS?
- SaaS COGS typically includes hosting and infrastructure costs, customer support and success team salaries, third-party software and API costs embedded in the product, payment processing fees, and DevOps personnel costs. R&D, sales, and marketing are operating expenses, not COGS.
- How can I improve my SaaS gross margin?
- Focus on infrastructure optimization (right-sizing instances, caching, CDNs), building self-service support resources to reduce ticket volume, negotiating better vendor contracts at scale, and improving product efficiency to reduce per-customer infrastructure costs.