Gross Margin is the percent of revenue retained by a company after they pay their Cost of Goods Sold (COGS). For a given month:

Gross Margin Formula‍

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Gross Margin is Gross Profit as a percent of revenue.

The gross margin is the gross profit divided by the sales. SaaS companies have low COGS (usually just hosting and customer support costs), which means they have very high gross margins (often 80% or more). This helps them make money in the long run. But it's still important to keep an eye on gross profit as a company grows.

Some businesses have customer service and operations workers fill in gaps in the product by hand, or they have products that need a lot of computing power, so they have to give a lot of their money to hosting companies. Vertical SaaS and hybrid SaaS companies also pay for low-margin services or services that happen in the real world.

It's okay for a new company to have a low gross margin as it grows, but it's important to know the costs and long-term margins of the business. A business can be successful with a wide range of gross margins. However, if operators don't know what their margins are, they could end up with unprofitable customer acquisition and service motions that cost them money and put the business at risk.