What Is Gross Margin?
Gross margin is the percentage of revenue that remains after you subtract the direct costs of delivering your product or service. If you earn $100 and it costs $22 to deliver that $100 of value, your gross margin is 78%. The remaining 78 cents has to pay for everything else: engineering salaries, marketing, rent, and eventually profit.
It matters to founders because it is the first filter on whether growth helps or hurts. A company with a high gross margin gets more room to spend per extra dollar of revenue; a company with a thin one can double its revenue and still barely move its cash position. Investors check it early for exactly that reason, often before they look at growth.
The Gross Margin Formula (and What Counts as COGS)
The formula is: Gross Margin % = (Revenue − Cost of Goods Sold) ÷ Revenue × 100. Cost of Goods Sold (COGS) is only what it takes to deliver what customers already bought. For a software company that typically means hosting and infrastructure, third-party APIs and licenses, payment processing fees, customer support, and onboarding or implementation labor.
The common mistake is putting too much in or too little in. Sales commissions, marketing spend, and R&D salaries are not COGS — they live in operating expenses and show up in CAC or burn instead. Leaving real delivery costs out (a support team, say) makes margin look better than it is and will surface painfully during due diligence.
| COGS (reduces gross margin) | Operating expenses (below gross profit) | |
|---|---|---|
| Infrastructure | Hosting, cloud, third-party API calls tied to usage | Internal dev tooling and staging environments |
| People | Customer support, onboarding, implementation | Engineering, product, sales, marketing, G&A |
| Payments | Card and payment processing fees | Accounting and legal fees |
| Where it shows up | Gross margin % | Burn rate and CAC |
What Is a Good Gross Margin? Benchmarks by Business Model
For pure software-as-a-service, 70–80% is the usual healthy range, and the best products run above 80%. Marketplaces and fintech products with payment costs tend to land between 30% and 60%, because processing and risk costs scale with volume. Hardware, delivery, and service-heavy businesses often sit between 20% and 50%.
These are rules of thumb, not pass-or-fail thresholds, and they depend on how revenue is defined. A marketplace that reports only its take rate as revenue will show a very different gross margin from one that reports the total transaction value. Compare yourself against companies with the same model, and write down which definition you used.
70–80%+
SaaS and software subscriptions
30–60%
Marketplaces and payment-heavy fintech
20–50%
Hardware, delivery, and services-heavy models
Gross Margin vs. Net Margin vs. Contribution Margin
Gross margin stops after direct delivery costs. Net margin goes all the way down: it subtracts every expense, including salaries, marketing, and taxes, and is negative for most early-stage startups. Contribution margin sits between them, subtracting variable costs such as commissions and per-customer acquisition spend, and is useful when you want to know what one more customer really adds.
Early on, gross margin is the one worth watching most closely because it tells you about the product's structure rather than your current spending. Net margin is dominated by how much you chose to invest this quarter; gross margin tells you whether the business model could ever be profitable at scale.
How Gross Margin Sets Your Burn and Runway
Your net burn is operating expenses minus gross profit, not minus revenue. Take a company with $40,000 MRR, $90,000 of monthly operating expenses, and $600,000 in the bank. At an 80% gross margin, gross profit is $32,000, net burn is $58,000, and runway is about 10.3 months. Drop gross margin to 60% on the same revenue and gross profit falls to $24,000, burn rises to $66,000, and runway shrinks to about 9.1 months.
The effect compounds through unit economics. With a $1,200 CAC and $100/month ARPA, an 80% margin recovers CAC in 15 months while a 60% margin takes 20. Five months of extra payback is five more months you must finance, which is why the CAC payback period in the LTV:CAC guide uses gross margin rather than revenue.
How to Improve Gross Margin Without Hurting the Product
There are three honest levers. Raise price, which drops straight to margin when delivery costs don't change. Cut delivery cost, through cheaper infrastructure, usage caps, automation of onboarding, or self-serve support. Or change the mix, by steering customers toward plans and segments that cost less to serve.
The trap is optimizing the number by degrading the product: cutting support until churn rises just moves the loss from COGS to retention, where it is worse. Whenever you cut a delivery cost, watch churn and retention for the next two or three cohorts before calling the saving real.
Where Gross Margin Shows Up in Founder Runway
Founder Runway does not track gross margin as its own metric. A run lasts 20 turns, each decision offers four options, and the effects land on cash, MRR, burn, and runway directly. The lesson transfers anyway: decisions that grow revenue by taking on costly-to-serve customers show up as burn that doesn't fall when MRR rises.
Try B2B, B2C, and B2G starts on the same stage and watch how differently revenue converts into usable runway. It is an intuition builder for the same trade-off gross margin measures, not a gross margin calculator.
Conclusion
Gross margin is the margin that remains after you pay to deliver what you sold, and it quietly determines how much of every new dollar of revenue can fund growth. Calculate it with an honest COGS, compare it against your own business model rather than a generic number, and read it alongside burn and payback period.
If your gross margin is healthy, scaling is a financing problem. If it isn't, scaling is a structural problem, and no amount of growth fixes it.
Frequently asked questions
What is gross margin?
Gross margin is the percentage of revenue left after subtracting the direct cost of delivering your product or service. If you earn $100 and delivery costs $22, gross margin is 78%. It shows how much of each revenue dollar is available to pay for everything else.
How do you calculate gross margin?
Subtract cost of goods sold from revenue, divide by revenue, and multiply by 100. For example, $100,000 revenue with $22,000 COGS gives (100,000 − 22,000) ÷ 100,000 = 78%.
What is a good gross margin for a SaaS startup?
Most investors consider 70–80% healthy for SaaS, and the best products exceed 80%. Margins below 60% are not fatal but usually point to heavy support, infrastructure, or implementation costs that need a plan.
What is included in COGS for a startup?
COGS covers the direct costs of delivering what customers bought: hosting, third-party APIs, payment processing fees, customer support, and onboarding labor. Sales, marketing, and R&D belong in operating expenses instead.
What is the difference between gross margin and net margin?
Gross margin subtracts only direct delivery costs, while net margin subtracts every expense, including salaries, marketing, and taxes. Early-stage startups usually have a high gross margin and a negative net margin at the same time.
How does gross margin affect runway?
Net burn equals operating expenses minus gross profit, so a lower gross margin means more cash leaves each month for the same revenue. On $40,000 MRR, dropping from 80% to 60% gross margin raises burn by $8,000 a month.
Test this decision in the game.
Apply the same assumption across one run and see which metric weakened three turns later.