What is Gross margin?
What's left of revenue after the direct cost of delivering it — (revenue − COGS) ÷ revenue.
Gross margin is the share of revenue left after paying the direct costs of delivering whatever was sold — the COGS line. It's the first quality test of a business model: gross margin funds everything else (sales, R&D, admin), so it caps how much the company can spend growing before each incremental dollar of revenue costs more than a dollar to serve.
The formula is simple; the judgment is what goes into COGS. Direct costs only: for software, hosting and support and contractor hours tied to delivery; for goods, materials, freight, manufacturing labor. Sales commissions and brand marketing don't belong (they're opex) — misclassifying them inflates gross margin and quietly moves the number to EBITDA's expense line instead of disappearing.
Track it per product or segment, not just company-wide: a blended 72% can be a 90% product subsidizing a 30% one. Mix shift — growing the low-margin product faster — moves blended margin down with no individual product getting worse, which is why margin commentary should always name mix as a suspect.
Formula
Gross margin % = (revenue − COGS) ÷ revenue × 100
COGS = direct delivery costs only. Gross profit is the dollar version (revenue − COGS); gross margin is the percent.
The Sumwise question
Calculate September gross margin from the GL: revenue, cost of goods sold (the 5xxx accounts), gross profit, and gross margin percent.
Runs on gl_2026.csv. The September GL sample with its 5xxx accounts (cloud infrastructure, contractors) as COGS and the 4xxx accounts as revenue.
Worked example — gl_2026.csv
| Revenue | $540,500 |
| COGS (cloud $84,200 + contractors $66,500) | $150,700 |
| Gross profit | $389,800 |
| Gross margin | 72.1% |
September gross margin is 72.1% — $389,800 of gross profit on $540,500 of revenue, before a dollar of opex is paid. Compare: EBITDA margin on the same month is −6.5%, so opex is where this P&L lives or dies.
gl_2026.csv — drop it into the demo's Your-own-CSV tab (or Excel) and re-run the example.
Common questions
What's the difference between gross margin and markup?
Markup is profit as a share of cost (GP ÷ COGS); margin is profit as a share of price (GP ÷ revenue). A 72% margin is a ~258% markup — quoting the wrong one doubles or halves the impression of profitability.
Where do salaries go — COGS or opex?
Engineering salaries for the product you sell are often COGS-adjacent (support and delivery roles clearly are); G&A and sales salaries are opex. The test: does the cost scale with delivery volume? Consistency period to period matters more than the exact split.
What's a typical SaaS gross margin?
70–85% is the common range — the sample's 72.1% sits inside it. Services-heavy businesses run far lower (30–50%), which is why segment-level margin beats the blended number.
Compute gross margin on your own export, every month
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Related terms
EBITDA margin
EBITDA as a percent of revenue — operating profitability before depreciation, amortization, interest and tax.
Variance percent
How far an actual landed from its benchmark, as a share of the benchmark — (actual − plan) ÷ plan.
ARR
Annual recurring revenue — the yearly value of active recurring contracts, usually MRR × 12.