What's the difference between gross margin and net margin?

Gross margin = (Revenue − COGS) / Revenue — only direct costs of producing/delivering the product. Net margin = (Revenue − all costs including operating, interest, taxes) / Revenue — what's left for owners after everything. Gross is typically 2-5x larger than net. A SaaS company at 80% gross margin might have 15-25% net margin (after sales/marketing/R&D/G&A); an e-commerce company at 40% gross margin might have 5-10% net margin. Both metrics matter; gross shows business model viability, net shows actual profitability.

What's a good gross margin for SaaS?

70-80% is mid-tier; 80-90% is healthy; above 90% is excellent (often pure-play software with low support burden). Below 70% suggests either heavy professional-services component (which is naturally lower margin) or hosting/support costs eating into product margin. Public SaaS comps: Snowflake 65-70% (high data egress costs), Datadog 80%, HubSpot 85%, Zoom 75% (heavy video infrastructure). The metric VCs care about is non-GAAP gross margin (excluding stock-based compensation in COGS); GAAP margins look slightly lower.

Why is e-commerce gross margin lower than SaaS?

Physical goods have actual COGS — manufacturing, shipping, returns, payment processing. SaaS COGS is mostly hosting (very efficient at scale) and customer support. A $50 e-commerce product typically has $20-25 COGS (40-50% margin). A $50 SaaS subscription has maybe $5-7 COGS (85-90% margin). The difference shows up in valuation: investors pay more for SaaS revenue because more of each dollar drops to gross profit. E-commerce winners (Amazon, Shopify) compensate with scale or platform plays rather than per-unit margin.

Should I include shipping in COGS?

Yes if shipping cost is variable per unit (which it usually is). Include outbound shipping (your cost to ship to the customer), payment processing (Stripe, PayPal fees), warehouse fulfillment cost per unit, and return processing as COGS components. Some companies pass shipping cost through to customers; that becomes 'shipping revenue' that should be netted against actual shipping cost (or both included gross — pick one approach and be consistent). Inbound freight (getting product to your warehouse) is COGS — part of acquiring the inventory.

How do I improve gross margin?

Five levers, in roughly this priority: (1) Raise prices. The single biggest margin lever; underpriced products kill margin and signal to customers that you compete on price not value. (2) Reduce direct costs — negotiate with suppliers, switch to cheaper materials/hosting, optimize manufacturing. (3) Mix-shift toward high-margin SKUs — discontinue or de-emphasize low-margin products. (4) Reduce returns and refunds — those eat margin invisibly. (5) Vertical integration — making in-house what you previously bought (only worth it at scale). Avoid trying to improve margin by skimping on quality; the customer-experience hit usually destroys long-term retention.

What's contribution margin and how is it different?

Contribution margin = Revenue − all variable costs (COGS + variable selling costs like commission and ad spend). It's what's left after every cost that scales with the next unit sold. It tells you whether each new customer profitably contributes to fixed cost coverage. Gross margin doesn't include sales costs; contribution margin does. SaaS contribution margin example: $100 ARR, $15 hosting/support COGS, $30 sales commission and CAC pay-back-month, contribution margin = ($100 − $15 − $30) / $100 = 55%. The closer this is to gross margin, the more efficient your customer acquisition is.

Career & Growth · Free tool

Gross Margin Calculator

Calculate your gross margin percentage from revenue and COGS, and compare it against industry benchmarks for SaaS and ecommerce. Free instant tool with no sign-up.

Updated June 2026

Revenue ($)COGS ($)

Show COGS breakdown (optional)

Optional COGS breakdown

Hosting ($)Payment processing ($)Support ($)Licensing ($)

Breakdown total: $30,000

Gross margin

75.0%

Gross profit

$90,000

Revenue − COGS

Industry fit

SaaS / software range

Top-quartile software margin. Leaves plenty of room for R&D and S&M.

Industry benchmark reference

Industry	Typical range	You vs range
SaaS / software	75% – 85%	In range
Consumer hardware	20% – 40%	Above
Marketplace	15% – 25%	Above
Professional services	40% – 60%	Above

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What it does

Calculate gross margin: (Revenue − Cost of Goods Sold) / Revenue. Enter top-line revenue and your direct costs (COGS — the costs that scale linearly with each unit sold), get gross margin in dollars and percentage. Tool also flags whether your margin is above, below, or typical for your business model based on industry benchmarks: SaaS 75-85% (mostly hosting and customer support), e-commerce 35-55% (depending on whether you make or resell), hardware 20-40%, marketplace / ad-tech 15-25%, low-margin retail (grocery, gas station) 2-15%.

Why gross margin matters more than revenue: revenue tells you the size of the business; gross margin tells you whether the business model can ever make money. A $10M-revenue SaaS company at 85% gross margin generates $8.5M to cover sales, R&D, and overhead — plenty of room for profitability. A $10M-revenue marketplace at 15% gross margin generates $1.5M to cover everything else — barely enough for engineering payroll. Investors evaluate companies on margin structure first; that’s why VCs love SaaS (high margin = scaling profitability) and avoid hardware (low margin = capital-intensive scaling). Knowing your benchmark helps you answer questions like “Why is my profitable e-commerce business at 30% margin getting valued at 1x revenue while a SaaS business at 80% margin gets 8x?”

Common gross margin mistakes: (1) Including overhead in COGS (rent, executive salaries, marketing) — those belong in operating expenses below the gross-margin line. COGS is only the costs that vary with each unit sold (manufacturing, shipping, payment processing, hosting per customer). (2) Not separating gross margin from contribution margin — gross subtracts COGS only; contribution also subtracts variable selling costs (commissions, paid acquisition). Contribution margin is what determines unit economics; gross margin is what determines the income statement. (3) Calculating with revenue gross of refunds and chargebacks. Use net revenue (after refunds, chargebacks, sales discounts) for accurate margin. (4) Ignoring product mix shift: if your premium SKU has 70% margin and budget SKU has 30% margin, your blended margin moves whenever mix shifts. Track margin by product line, not just blended.

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How to use it

Enter total revenue (net of refunds, returns, and chargebacks). Use the period that's relevant — monthly, quarterly, annual.
Enter Cost of Goods Sold (COGS): direct costs that scale with units sold. For SaaS: hosting, customer support staff, payment processing. For e-commerce: product cost, shipping, payment fees. For services: contractor / fulfillment labor.
Read your gross profit (Revenue − COGS) and gross margin percentage (Gross Profit / Revenue × 100).
Compare to industry benchmark shown for your business model. SaaS at 60% is concerning; e-commerce at 60% is excellent.
Track gross margin over time — month-over-month or quarter-over-quarter trends matter more than the absolute number. Margin compression often signals competitive pressure or rising input costs.
Break down by product / SKU / customer segment — blended margin masks problems. A high-margin product can compensate for a low-margin product, but you need to know which is which.

When to use this tool

Investor pitches and due diligence — gross margin is the first metric investors look at after revenue.
Pricing decisions — knowing margin helps you decide if a 10% discount destroys profitability or is sustainable.
Product-line comparisons — your high-margin SKUs deserve more marketing spend than your low-margin SKUs even if revenue is identical.
Competitive analysis — competitors' margin (from public filings or industry reports) hints at their pricing power, supply chain efficiency, and likely strategic moves.

When not to use it

When you don't know your true COGS — most early-stage businesses underestimate COGS by missing freight, payment processing, and customer service costs. Get accurate cost accounting before computing margin.
Comparing across business models without context — SaaS vs hardware margins aren't comparable; a 75% SaaS margin and 30% hardware margin can both be 'good for the model.'
Service businesses billing hourly — gross margin concept applies but the math is different (utilization × rate − contractor cost). Use a different framework.
Pre-revenue companies — projected margin is meaningful, but actual margin is calculated from real data, not projections.

Frequently asked questions

What's the difference between gross margin and net margin?: Gross margin = (Revenue − COGS) / Revenue — only direct costs of producing/delivering the product. Net margin = (Revenue − all costs including operating, interest, taxes) / Revenue — what's left for owners after everything. Gross is typically 2-5x larger than net. A SaaS company at 80% gross margin might have 15-25% net margin (after sales/marketing/R&D/G&A); an e-commerce company at 40% gross margin might have 5-10% net margin. Both metrics matter; gross shows business model viability, net shows actual profitability.
What's a good gross margin for SaaS?: 70-80% is mid-tier; 80-90% is healthy; above 90% is excellent (often pure-play software with low support burden). Below 70% suggests either heavy professional-services component (which is naturally lower margin) or hosting/support costs eating into product margin. Public SaaS comps: Snowflake 65-70% (high data egress costs), Datadog 80%, HubSpot 85%, Zoom 75% (heavy video infrastructure). The metric VCs care about is non-GAAP gross margin (excluding stock-based compensation in COGS); GAAP margins look slightly lower.
Why is e-commerce gross margin lower than SaaS?: Physical goods have actual COGS — manufacturing, shipping, returns, payment processing. SaaS COGS is mostly hosting (very efficient at scale) and customer support. A $50 e-commerce product typically has $20-25 COGS (40-50% margin). A $50 SaaS subscription has maybe $5-7 COGS (85-90% margin). The difference shows up in valuation: investors pay more for SaaS revenue because more of each dollar drops to gross profit. E-commerce winners (Amazon, Shopify) compensate with scale or platform plays rather than per-unit margin.
Should I include shipping in COGS?: Yes if shipping cost is variable per unit (which it usually is). Include outbound shipping (your cost to ship to the customer), payment processing (Stripe, PayPal fees), warehouse fulfillment cost per unit, and return processing as COGS components. Some companies pass shipping cost through to customers; that becomes 'shipping revenue' that should be netted against actual shipping cost (or both included gross — pick one approach and be consistent). Inbound freight (getting product to your warehouse) is COGS — part of acquiring the inventory.
How do I improve gross margin?: Five levers, in roughly this priority: (1) Raise prices. The single biggest margin lever; underpriced products kill margin and signal to customers that you compete on price not value. (2) Reduce direct costs — negotiate with suppliers, switch to cheaper materials/hosting, optimize manufacturing. (3) Mix-shift toward high-margin SKUs — discontinue or de-emphasize low-margin products. (4) Reduce returns and refunds — those eat margin invisibly. (5) Vertical integration — making in-house what you previously bought (only worth it at scale). Avoid trying to improve margin by skimping on quality; the customer-experience hit usually destroys long-term retention.
What's contribution margin and how is it different?: Contribution margin = Revenue − all variable costs (COGS + variable selling costs like commission and ad spend). It's what's left after every cost that scales with the next unit sold. It tells you whether each new customer profitably contributes to fixed cost coverage. Gross margin doesn't include sales costs; contribution margin does. SaaS contribution margin example: $100 ARR, $15 hosting/support COGS, $30 sales commission and CAC pay-back-month, contribution margin = ($100 − $15 − $30) / $100 = 55%. The closer this is to gross margin, the more efficient your customer acquisition is.

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