What is Gross Margin?
Nexa Consultancy | Startup & Finance Glossary
Gross Margin is a profitability ratio that measures the percentage of revenue that exceeds the Cost of Goods Sold (COGS). It represents the portion of each sale that the company retains after incurring the direct costs associated with producing the goods or services sold.
For Startups: A healthy gross margin is essential for a startup's long-term viability. It indicates how efficiently the company is producing its products or services. A low gross margin may signal issues with pricing, production costs, or scalability.
For SaaS: SaaS companies are known for their high gross margins, often exceeding 80%. This is because the direct costs of providing the software (e.g., hosting, customer support) are relatively low compared to the subscription revenue.
Calculation: Gross Margin = ((Revenue - COGS) / Revenue) * 100. For instance, if a company has revenues of ₹10 Lakhs and COGS of ₹3 Lakhs, its gross margin is 70%.