Gross margin
Revenue minus the direct cost of delivering that revenue, divided by revenue. The percentage of each dollar of revenue you keep before operating expenses.
Gross margin is (revenue − cost of goods sold) ÷ revenue. If you sell $100 of product and it cost you $40 to make and deliver, your gross margin is 60%. The 60% — the "gross profit" — is what you have left to pay overhead, salaries, marketing, and (eventually) net profit.
Margin profile defines what kind of business model you're running:
- SaaS: 70-85% typical. Software has near-zero marginal cost.
- E-commerce / physical products: 30-50% typical. COGS includes the product itself, packaging, shipping.
- Services: 30-60% typical. Labour-intensive.
- Marketplaces (taking commission): 60-80% on the take rate.
- Grocery, low-margin retail: 10-20%. Volume game.
A "good" gross margin depends entirely on the model. A 30% gross margin is amazing for grocery and disastrous for SaaS.
The number drives strategy. High-margin businesses can fund big upfront acquisition spend (CAC) because each customer is mostly profit. Low-margin businesses live and die on volume and efficiency — they can't outspend competitors on growth.
When investors evaluate a startup, gross margin is often the second slide after the revenue curve. Models that look like one type of business but actually have margins of another type get scrutinised hard.
See also
- Unit economics — The revenue and costs associated with one customer (or one transaction). The fundamental health check for whether scaling makes the business better or worse.
- LTV (Lifetime Value) — The total revenue (or gross profit) you expect to earn from a customer across their entire relationship with you.
- COGS (Cost of Goods Sold) — The direct costs of producing and delivering whatever you sell. Excludes overhead, marketing, and salaries unrelated to delivery.
- Burn rate — How much cash a startup spends each month above what it earns. Net burn = expenses − revenue.
Ask Cashowa about gross margin
Apply this concept to your actual numbers — with verifiable math.