Gross Margin
Revenue minus cost of goods sold, as a percentage of revenue. Whether the business model scales.
What it measures
Revenue less the cost of delivering it, as a percentage of revenue. In software the arithmetic is easy and the classification is where the judgement lives.
What belongs in cost of revenue
| Cost | Usually in? | The argument |
|---|---|---|
| Hosting and infrastructure | Yes | Directly consumed by delivering the product |
| Third-party services in the product | Yes | Passed through to the customer |
| Support | Yes | Required to keep customers running |
| Customer success | Partly | Retention portion yes; expansion portion is a sales cost |
| Onboarding and implementation | Usually | Required before the customer gets value |
| Sales and marketing | No | Cost of acquiring, not of delivering |
Source: Conventions summarised here
Why this is a revenue operations problem, not only a finance one
Using it
Agree the classification once, write it down, and keep it stable. Comparability over time matters more than picking the theoretically perfect boundary.
Compute margin per segment. A segment needing heavy implementation can be near-zero margin while the blended figure looks healthy.
Recompute after any pricing or packaging change, since both move the denominator without touching the cost base.
Feed the result into LTV and payback rather than using revenue there.
RELATED TERMS
Burn Multiple
Net cash burned divided by net new ARR added — how much cash is consumed to produce a unit of recurring revenue.
CAC Payback Period
How long it takes for a customer's gross profit to repay the cost of acquiring them. The bridge between sales efficiency and cash flow.
LTV:CAC Ratio
Lifetime value divided by acquisition cost. Whether a customer returns more than they cost to win.
COMMON QUESTIONS
- What counts as cost of revenue in SaaS?
- Hosting and infrastructure, third-party services embedded in the product, support, and the portion of customer success required to keep customers running. Sales and marketing are not cost of revenue; onboarding usually is.
- Why does gross margin matter for revenue operations?
- Because LTV, payback period and every efficiency ratio should be computed on margin, not revenue. Using revenue overstates all of them, often by a wide margin in a service-heavy business.
- Should customer success sit in cost of revenue?
- The part required to keep customers working, yes. The part driving expansion is closer to a sales cost. If the team does both and you cannot separate them, say which convention you used — the choice moves the number materially.
- What is a good SaaS gross margin?
- Software businesses typically run high because delivery cost does not scale with revenue. A materially lower figure usually means the product needs human effort per customer, which is a scaling constraint rather than an accounting quirk.
FURTHER READING
Learn how to apply this: RevOps 101: Revenue Operations Foundations
Definitions are the vocabulary. The courses are where you learn to operate it, with the interactive audit tools.
See the course