Gross margin is revenue minus cost of goods sold (COGS), expressed as percentage. Shows profitability per sale before operating expenses. SaaS target: 70-90%. Services: 30-50%. E-commerce: 20-40%.
Gross margin reveals unit economics viability. Formula: (Revenue - COGS) ÷ Revenue × 100. COGS includes direct costs to deliver product: hosting (AWS, servers), support staff, payment processing fees, refunds. Does NOT include: Sales/marketing (CAC), R&D, admin, rent. Why it matters: Shows scalability—high margin businesses can invest more in growth and still be profitable. VCs love high gross margin (70%+ for SaaS) because proves business gets more profitable at scale. Low margin (20-40%) businesses need massive scale to be profitable. Industry benchmarks: SaaS: 70-90% (low delivery costs, scales well). Marketplace: 20-40% (takes cut of transactions). E-commerce: 20-40% (physical goods, shipping, returns). Services: 30-50% (labor intensive). Hardware: 30-50% (manufacturing costs). Improving gross margin: Increase prices (most effective), Reduce COGS (better infrastructure, offshore support, automation), Move upmarket (enterprise customers higher value, similar costs), Add software to service business (increase margin mix). VC rule: Need 60%+ gross margin to be fundable SaaS. Below 60% considered "low margin" requiring different strategy (volume vs value).
Gross Margin % = ((Revenue - COGS) ÷ Revenue) × 100. Example: ₹100 revenue, ₹20 COGS = 80% gross margin~70% gross margin at scale. Revenue ₹30,000 crore, COGS ₹9,000 crore. High margin funds 40% of revenue on R&D and still profitable.
~40% gross margin on e-commerce (thin). Makes up with volume (₹38 lakh crore revenue). AWS has 70%+ margins (subsidizes low-margin retail).
Consulting firm: 40% gross margin. ₹100L revenue, ₹60L salaries/COGS = ₹40L gross profit. Needs scale to cover ₹30L operating costs and make ₹10L profit.
Gross margin determines business viability. High margin (70%+) = can spend on sales/marketing and still profit. Low margin (20-30%) = need massive efficiency or volume. SaaS with <60% margin struggles to raise VC funding—not scalable enough. Marketplace with <20% margin can't cover costs.
70-90% excellent (top quartile). 60-70% acceptable. <60% concerning for VCs—might not be scalable. Best SaaS: 80-85% (Zoom, Shopify, Atlassian).
Increase prices (biggest impact), Reduce infrastructure costs (optimize AWS, use cheaper hosting), Automate support (reduce headcount), Move upmarket (enterprise = higher value, same costs), Bundle products (cross-sell increases revenue per customer).
Shows scalability. High margin = more profit per customer = can afford higher CAC = faster growth. Low margin requires massive scale to be profitable (harder to fund/execute).
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