VC & PE Glossary
What Is Gross Margin?
Updated
Definition
Gross margin is revenue minus direct costs of delivering the product—expressed as a percentage—showing unit economics before overhead and sales spend.
Useful for: Founders, Investors
Gross margin measures how much of each revenue dollar remains after direct costs to serve customers—the foundation of scalable unit economics.
How it works
For SaaS, direct costs often include hosting, customer support tied to delivery, payment processing, and third-party API fees. Subtract those from revenue and divide by revenue for gross margin percentage. Software businesses target high gross margins because R&D and sales load sits below the gross line. Marketplaces and hardware see lower margins by nature—success depends on velocity, take rate, or supply chain efficiency. Gross margin differs from contribution margin and operating margin, which allocate more overhead. Improving gross margin might mean pricing changes, infrastructure optimization, or shifting low-margin customer segments.
Why it matters
- Founders: Track gross margin by cohort and product line—investors will slice your blended number apart in diligence.
- Investors: Gross margin informs whether growth spending compounds value or destroys it; margin expansion stories support premium valuations.
Common mistake
Excluding real delivery costs to inflate margin—support engineers, success teams, or cloud tied to serving users belong in COGS when they scale with usage.
Related ideas
COGS, contribution margin, unit economics, free cash flow, and net revenue retention.
Related terms
- Free Cash Flow — Free cash flow is the cash a business generates after paying operating expenses and capital expenditures—the money left to repay debt, distribute to owners, or reinvest without raising new capital.
Common questions
Short answers for founders, LPs, and operators