What is Gross Profit Margin?

Your gross margin is how much you make, as a percentage, after you pay the cost directly associated with making your products or services. Gross margins tend to vary by industry, so a high or low gross margin isn’t necessarily good or bad. But software as a service (SaaS) companies tend to have low direct costs and high gross margins.

To calculate your gross profit margin, start by determining your gross profit — your revenue minus cost of goods sold (COGS) — and then divide that by your revenue.

As a founder, you might initially focus on your burn rate, annual recurring revenue, and growth. However, as you work through the early stages, increasing your gross margin could become more important for sustaining your growth. 

You can think of an increasing gross margin as an increasingly efficient operation. It leaves you with more money left over to invest in operating expenses, such as marketing and headcount.