Gross margin is revenue minus cost of goods sold (COGS) expressed as a percentage of revenue. It represents the portion of revenue available to cover operating expenses (sales, marketing, engineering, G&A) and ultimately produce profit. Gross margin varies dramatically by business model: SaaS typically 70-85%, physical goods 20-50%, marketplaces variable by take rate, services 40-70%. It's one of the most-important indicators of business model quality because operating costs are largely fixed at scale, and gross margin determines the ceiling on profitability. It distinguishes economically scalable business models from ones that struggle to ever become profitable.
The calculation:
Basic formula: