Why use this calculator
Gross margin is how investors and acquirers judge whether a software business can scale. It shows what share of each revenue dollar is left after the cost of actually delivering the service, and therefore how much can fund product, sales and profit. Public SaaS companies typically run at 70% to 85%, and a business stuck below 60% is often valued more like a services firm than a software company.
The trouble is that founders frequently leave support salaries or payment fees out of cost of revenue and quote a flattering figure that falls apart in due diligence. This calculator builds cost of revenue the way an investor would, then goes one step further to contribution margin, which shows what each sale leaves once commissions and other variable selling costs are paid.
How to use it
- Enter MRR as the subscription revenue recognised this month from your billing system or revenue report, excluding one-off setup fees.
- Enter hosting and infrastructure from your cloud provider invoices for the production environment only, not development and testing.
- Enter support and success costs as the monthly salaries of support and onboarding staff plus their helpdesk tools, from payroll.
- Enter third-party software as the APIs and licences the product needs to serve customers, from vendor invoices.
- Enter payment fees as the percentage your card processor charges, shown on your Stripe or merchant statement.
- Enter variable selling costs as commissions and partner fees earned on this month's revenue.
What each result means
- Gross Margin
- The share of revenue left after the direct cost of serving customers. Strong SaaS runs at 75% to 85%; below 60% limits how fast you can profitably grow.
- COGS Cut for a 75% Gross Margin
- How much monthly cost of revenue you would need to remove for gross margin to reach 75 per cent, the low end of the range strong software businesses hold. The note gives the MRR that would do the same job at today's costs.
- Monthly Gross Profit
- Revenue minus cost of revenue in dollars. This is the pool that pays for product development, marketing, administration and eventually profit.
- Monthly Cost of Revenue (COGS)
- The total monthly cost of delivering the service, including support staff and payment fees, which founders often leave out.
- Payment Processing Fees
- Card and payment processor charges on revenue. They count as cost of revenue because they rise directly with every dollar billed.
- Contribution Margin
- Gross margin after variable selling costs like commissions. It shows what each extra dollar of sales really adds before fixed overheads.
- Monthly Contribution
- Gross profit minus variable selling costs in dollars. Fixed costs must be covered from this before the business makes a profit.
- Annual Recurring Revenue (ARR)
- MRR multiplied by twelve. The headline scale figure for a subscription business, used in valuations and investor updates.
- Annual Gross Profit
- Monthly gross profit multiplied by twelve, assuming the current month's costs and revenue hold for a year.
The formula
Payment fees = MRR x payment fee %
Cost of revenue
(COGS) = hosting + support + third-party software + payment fees
Gross profit = MRR - COGS
Gross margin = gross profit / MRR x 100
Contribution = gross profit - variable selling costs
Contribution margin = contribution / MRR x 100
ARR = MRR x 12
Annual gross profit = monthly gross profit x 12
How this number is used in practice
Gross margin and contribution margin answer different questions. Gross margin, the standard accounting measure, tells you how efficiently the product is delivered and is what investors benchmark. Contribution margin, a management measure, subtracts every cost that rises with each sale, including commissions and reseller fees, and tells you what an extra customer is worth before fixed overheads.
A reseller-heavy business can show an 80% gross margin and a much thinner contribution margin, which changes how much it can afford to spend acquiring customers.
The usual reasons margins disappoint are infrastructure that was never right-sized after early growth, support teams that grow with every new customer because the product lacks self-service, and expensive third-party APIs priced per call. Benchmarks vary by segment: pure self-serve products can exceed 85%, while platforms that include payments, telephony or heavy data processing often sit at 50% to 70%.
Be consistent in classification from month to month, because moving a cost line between cost of revenue and operating expenses changes the margin without changing the business.
Worked examples
$100,000 MRR with $8,000 hosting, $15,000 support, $5,000 third-party software, 2.5% card fees and $6,000 commissions
Cost of revenue $30,500, gross margin 69.50% and contribution margin 63.50%
An early-stage product at $30,000 MRR with $5,000 hosting, $10,000 support, $3,000 software, 3% fees and no commissions
Gross margin of only 37.00%, with $18,900 of monthly cost of revenue
A mature platform at $500,000 MRR with $35,000 hosting, $40,000 support, $10,000 software, 2% fees and $25,000 reseller fees
Gross margin of 81.00% and contribution margin of 76.00%, ARR of $6,000,000
When people use it
- Preparing gross margin figures for an investor pitch or due diligence
- Benchmarking against public SaaS companies
- Deciding whether a hosting or support cost project is worth the effort
- Setting a customer acquisition budget from contribution margin
- Tracking whether margins improve as the business scales
Tips
- Include support salaries and payment fees in cost of revenue. Investors will add them back if you do not.
- Tag cloud resources by environment. Development and test spending belongs in R&D, not cost of revenue.
- Commit to reserved or savings plan pricing once usage is stable; it commonly cuts compute cost by a third or more.
- Invest in self-service help and in-app guidance. Support cost per customer should fall as you scale.
- Price usage-heavy features so that the third-party API cost is recovered, not absorbed.
- Review margin by plan or customer segment. One unprofitable tier can drag the whole average down.
What it assumes, and where it stops being accurate
- Revenue is recurring subscription revenue for one month. One-off setup and services revenue, which usually carries much lower margins, is excluded.
- Customer support and success are treated as cost of revenue, which is common SaaS practice. Some companies classify customer success as sales expense.
- Payment fees are a flat percentage of revenue. Fixed per-transaction fees and currency conversion charges are ignored.
- Research and development, sales salaries, marketing and administration are operating expenses and are not included.
- Annual figures simply multiply this month by twelve, with no growth or cost change.
Terms used on this page
- Gross margin
- Revenue minus cost of revenue, divided by revenue.
- Contribution margin
- Revenue minus all variable costs, including variable selling costs, divided by revenue.
- Cost of revenue
- The direct cost of delivering the service to paying customers, also called COGS.
- ARR
- Annual recurring revenue: monthly recurring revenue multiplied by twelve.
Questions people ask
- What is a good gross margin for SaaS?
- Strong SaaS businesses run at 75% to 85% gross margin. Between 60% and 75% is acceptable at an early stage or for products with payments or heavy data processing. Below 60% usually means the service costs too much to deliver and should be fixed before spending heavily on growth.
- What is the difference between gross margin and contribution margin?
- Gross margin subtracts only the cost of delivering the service. Contribution margin also subtracts variable selling costs such as sales commissions, reseller margins and affiliate fees. Gross margin is the investor benchmark; contribution margin tells you what each additional sale is really worth to the business.
- What belongs in SaaS cost of revenue?
- Production hosting and infrastructure, customer support and onboarding staff, third-party software and APIs embedded in the product, payment processing fees and the DevOps effort to keep the service running. Research and development, sales, marketing and general administration are operating expenses and sit below gross margin.
- Should customer success be in cost of revenue?
- It depends on what the team does. Time spent helping customers use the product they already pay for is usually cost of revenue. Time spent on renewals and upsells is closer to a sales cost. Pick a policy, disclose it and apply it consistently so margins are comparable over time.
- How can I improve my SaaS gross margin?
- Right-size and reserve cloud capacity, cache heavily, move support toward self-service, renegotiate vendor contracts as volume grows, and make sure pricing recovers the cost of expensive features. Raising prices for the heaviest users often improves margin faster than any cost project.
Use this with
SaaS Gross Margin Calculator answers one part of the question. These pick up where it stops: Profit Margin Calculator, Customer Churn Rate Calculator, Startup Burn Rate Calculator and Markup Calculator.
Where these figures come from
This calculation is jurisdiction-neutral arithmetic. No country-specific rules are applied.
- U.S. Securities and Exchange Commission: Beginners' Guide to Financial Statements. Gross profit and cost of revenue definitions
- Financial Accounting Standards Board. US GAAP revenue recognition standards (ASC 606)
- business.gov.au: Finance. Australian guidance on profit margins and financial management
SaaS Gross Margin Calculator produces an estimate for general information. It is not financial, tax, medical, legal or engineering advice. read the full disclaimer. Spotted a wrong number? Report it and it gets fixed. The form picks up this calculator and the inputs you used.