Gross Margin and Valuation: Why Margin Quality Matters
Learn how to benchmark gross margin and improve it without damaging customer experience.
Trust & methodology
Author: Amanda White
Last updated: 2026-01-12
Last reviewed: 2026-01-12
Methodology: Benchmarks are cross-checked across market reports, transaction comps, and founder-level operating data.
Disclosure: This content is general information, not financial advice.
On this page
- What you'll learn
- Why it matters
- The metric or formula
- Benchmarks & ranges
- Common mistakes
- How to improve it
- Examples
- Checklist
- FAQs
- Summary
- Sources & further reading
- Internal links
- Next steps
- Related resources
- Run the calculator
Jump to the section you need, or keep scrolling for the full playbook.
What you'll learn
You will learn why gross margin is a proxy for scalability and how buyers adjust valuation when margins are below SaaS benchmarks. We explain how to calculate margin correctly and avoid common misclassifications.
We also show how margin interacts with pricing, retention, and product mix. A strong margin profile signals the ability to reinvest in growth without excessive dilution.
Finally, you will get improvement strategies that protect customer outcomes while raising margin.
Quick definition (TL;DR)
SaaS valuation deep diveGross margin is revenue minus cost of goods sold, expressed as a percentage of revenue. For SaaS, COGS includes hosting, support, and third-party infrastructure.
Buyers want to see gross margin above 70% because it suggests that the business can scale efficiently and generate attractive cash flow.
Why it matters
Low gross margin signals structural inefficiency and drags down valuation multiples.
High margin gives you flexibility to invest in growth without burning cash.
Margins reveal the true profitability of your unit economics and pricing model.
Buyers use margin stability to assess risk in scaling infrastructure costs.
The metric or formula
Gross Margin % = (Revenue - COGS) / Revenue. For SaaS, make sure COGS includes hosting, support, and third-party infrastructure, but not R&D or sales.
Track margin by product line and customer segment to show where profitability is strongest or weakest.
Benchmarks & ranges
70%–80% gross margin is standard for B2B SaaS with efficient infrastructure.
60%–70% margins are common for usage-heavy or AI-intensive products, but require a path to improvement.
Margins below 60% often lead to services-like valuations unless there is a strong plan to improve.
Enterprise SaaS with heavy onboarding can still command high multiples if margins trend upward.
Common mistakes
Classifying support or success costs inconsistently, which inflates margin.
Ignoring infrastructure cost spikes as usage grows.
Allowing custom implementation work to sit in COGS without pricing for it.
Failing to show margin trends over time during diligence.
How to improve it
Optimize infrastructure spend with reserved instances, caching, or model routing strategies.
Automate onboarding and support workflows to reduce variable costs.
Price for premium support or heavy usage rather than absorbing costs.
Segment customers and prioritize those with higher margin profiles.
Monitor margin monthly and tie improvements to operational initiatives.
Examples
Proof points you can reuse
AI SaaS improving margin
An AI SaaS platform had 58% margin due to high inference costs. By optimizing model routing and introducing usage tiers, margin improved to 70%. Buyers increased the multiple because margins now aligned with SaaS benchmarks.
Enterprise SaaS with onboarding-heavy costs
A workflow automation company invested heavily in onboarding, keeping margins at 68%. They introduced paid onboarding packages and self-serve training, raising margins to 76% while reducing churn. The margin trend helped justify a premium multiple.
Checklist (copy/paste)
Calculate gross margin consistently and validate COGS classifications.
Track margin by product line and customer segment.
Identify the top cost drivers and create a mitigation plan.
Price for usage or premium support where costs scale.
Communicate margin trends with context in investor updates.
Pair margin metrics with retention and growth for a complete story.
FAQs
Is 70% gross margin required for SaaS?
It is a common benchmark, but not a hard rule. If margins are lower, you need to show a credible path to improvement.
Should support costs be in COGS?
Yes. Support and success costs tied to serving customers belong in COGS to accurately reflect margin.
How do I handle AI infrastructure costs?
Track them separately and show optimization initiatives. Buyers want to see that cost per output improves over time.
Does margin matter more than growth?
Both matter. High growth can offset lower margin in the short term, but buyers still want a margin roadmap.
Can services revenue improve margin?
Services can help if they are high margin, but buyers often discount services-heavy businesses. Be transparent.
How often should I report margin?
Monthly internal reporting is standard, with quarterly summaries for investors or buyers.
Summary
Gross margin is a core valuation lever because it signals scalability. Buyers reward SaaS businesses that can grow without margin erosion.
If your margin is below benchmarks, show a clear path to improvement and document progress each quarter.
Sources & further reading
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Next steps to act on this guide
RecommendedTranslate the insights into a valuation narrative by running the calculator, then use the tools and category playbooks to tighten your metrics before you talk to buyers or investors.
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