Gross Margin

Gross Margin is the percentage of revenue left after subtracting the direct cost of delivering the product or service.

Why it matters

For software companies, hosting, third-party APIs, customer support, payment processing, and service-delivery labor may affect cost of revenue. Engineering choices can therefore materially improve or weaken gross margin.

Mental model

Gross profit is revenue minus direct delivery costs. Gross margin expresses that gross profit as a percentage of revenue.

Practical considerations

• Define consistently which costs belong in cost of revenue.
• Track margin by product, customer segment, or pricing plan.
• Evaluate whether usage growth increases cost faster than revenue.
• Consider reliability and support costs, not only infrastructure.

Common mistakes

• Excluding material delivery costs to make margin appear stronger.
• Comparing companies that classify costs differently.
• Optimizing infrastructure cost while damaging customer value.