what is a good saas gross margin
Founders putting together a board pack or an investor update usually reach the same point in the numbers and wonder what a good SaaS gross margin looks like for a business at their stage. The figure is one of the first things investors look at and a margin that is lower than expected or worked out differently can prompt a lot of questions.
For most B2B SaaS businesses, a healthy gross margin on subscription revenue sits at around 80%, according to Benchmarkit’s 2025 SaaS benchmarks, with the total margin usually a little lower once professional services are included. Knowing how the figure is built, which costs belong in it and how it compares with those benchmarks will help you judge your own margin fairly and explain it with confidence when investors ask.
Key takeaways
- Gross margin shows how much of each pound of revenue is left after the direct costs of delivering your software to customers.
- Hosting, DevOps, customer support and third-party software built into the product usually belong in cost of sales, while sales commissions and product management do not.
- The gross profit in your statutory accounts can differ from the SaaS gross margin investors ask for, so the two need reconciling.
- Services-heavy revenue, AI and API costs and hosting billed in dollars are common reasons a UK SaaS margin sits below published benchmarks.
- Checking how your cost of sales is built, ideally with an accountant, helps before you compare your margin with published benchmarks.
What is SaaS gross margin and why does it matter?
SaaS gross margin is the percentage of your revenue left after deducting the direct costs of delivering your software and supporting the customers who use it. It measures how efficiently the product itself turns revenue into profit, before any spending on sales, marketing, research or general overheads.
Investors and boards watch the figure closely because it sets the ceiling on how profitable the business can become. A company with a high gross margin keeps most of every new pound of subscription revenue, which leaves room to invest in growth and eventually reach profit. A company with a low gross margin has to grow much larger to cover the same overheads, so its path to profit is longer and less certain.
Gross margin also tells investors something about the type of business they are looking at. Software that customers use without much human involvement tends to carry a high margin. A business that relies on people to deliver, configure or support its product looks closer to a services company and is usually valued on that basis.
What to include in cost of sales for a SaaS business
Cost of sales for a SaaS business should include the costs you incur to run the product and keep customers using it. Costs that relate to winning new customers, planning the product or running the company sit lower down the profit and loss account.
The split below follows SaaS Capital’s guidance on SaaS cost of sales, which reflects how most investors expect the figure to be built:
| Usually included in cost of sales | Usually left out of cost of sales |
|---|---|
| Hosting and cloud infrastructure | Sales commissions |
| Salaries of DevOps and infrastructure staff | Product management |
| Customer support and customer success focused on keeping customers | Customer success focused on upselling |
| Third-party software, data or APIs built into the product | Amortised software development costs |
| Other direct costs of delivering the service | General overhead allocations |
Customer success is the category that most often needs a judgement call. The part of the team that keeps existing customers running smoothly belongs in cost of sales, while time spent selling upgrades or new modules is closer to a sales cost. Where one person does both, a reasonable split based on their time is usually acceptable, provided you apply it consistently from one period to the next.
How do you calculate your gross margin?
You calculate gross margin by taking your revenue, deducting cost of sales and dividing the result by revenue.
Formula:
Gross margin = (revenue − cost of sales) ÷ revenue
Expressed as a percentage, that figure is your gross margin.
Why subscription and total margin differ
Most SaaS businesses benefit from calculating two versions. Subscription gross margin looks only at recurring software revenue and the costs of delivering it. Total gross margin includes everything, including onboarding, implementation and consulting work. Investors usually want to see both, because services revenue tends to carry a much lower margin and can pull the total down.
The example below shows how that works for a company with £1,000,000 of subscription revenue and £150,000 of services revenue:
| Line | Subscription | Services | Total |
|---|---|---|---|
| Revenue | £1,000,000 | £150,000 | £1,150,000 |
| Cost of sales | £200,000 | £105,000 | £305,000 |
| Gross profit | £800,000 | £45,000 | £845,000 |
| Gross margin | 80% | 30% | 73.5% |
The subscription side of the business sits right in line with the benchmark, yet the total margin comes out several points lower because of the services work. Looking only at the total figure would make the software look weaker than it is, which is why the split matters.
Why your statutory accounts may show a different figure
The gross profit in your statutory accounts and the SaaS gross margin investors ask for are often two different numbers. Both can be correct, because they are prepared for different purposes.
UK company accounts follow the profit and loss formats set out in the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, where Format 1 shows turnover, then cost of sales, then gross profit, followed by distribution costs and administrative expenses. The format sets the headings but does not list which SaaS costs belong under each one, so the allocation depends on the company’s accounting policies and the choices made when the accounts were first prepared.
In practice, the statutory cost of sales line may include costs that investors would leave out, such as the amortisation of capitalised development costs or the salaries of the whole engineering team. It may also leave out costs they would include, for example when hosting or support staff have been recorded under administrative expenses.
The simplest way to handle the difference is a short reconciliation that starts with statutory gross profit and shows each adjustment needed to reach your SaaS gross margin. Keeping that bridge in your board pack and data room and using the same definitions every period means an investor can check your figure against the filed accounts without having to question it.
How does your gross margin compare with published benchmarks?
Once your margin is calculated on the same basis investors use, you can compare it with published survey data. The two most useful reference points are the medians for subscription revenue and for total revenue.
Published benchmarks for private B2B SaaS businesses:
| Measure | Benchmark | Source |
|---|---|---|
| Subscription gross margin | 81% median | Benchmarkit, 2025 |
| Total gross margin | 77% median | Benchmarkit, 2025 |
| Professional services gross margin | 30% median | Benchmarkit, 2025 |
| Gross margin on SaaS revenue | Generally 80% to 85% | SaaS Capital survey data |
SaaS Capital’s 2026 spending benchmarks, based on a survey of more than 1,000 private B2B SaaS companies, also show where the costs sit. Hosting and DevOps each account for a small single-digit share of annual recurring revenue at the median, with services and other delivery costs making up most of the rest.
Both surveys cover private SaaS companies across the market rather than UK businesses alone, so they work best as a guide to what investors will compare you with. Company stage also affects how your figure compares. An early-stage company with a small customer base carries fixed hosting and support costs across fewer customers, so its margin will often sit below these medians and should improve as revenue grows.
Why your SaaS gross margin may be lower and how to improve it
A margin below the survey figures usually has a clear cause that can be traced in the cost of sales line. The five causes below are worth checking first, each followed by the change that addresses it:
- Services-heavy revenue:
Onboarding, implementation and consulting work carry a much lower margin than software, so a company that earns a significant part of its revenue from services will see its total margin fall even when the subscription margin is healthy. Pricing that work to reflect the time it takes or building more of it into the product so customers can set themselves up narrows the gap. - AI and API costs:
Products that call large language models or other third-party APIs pay for each use, so those costs rise with customer activity in a way that traditional hosting often does not. If your pricing was set before those features were added, reviewing it and introducing usage limits or a separate tier for heavy users lets the cost follow the customers who drive it. - Hosting and software billed in US dollars:
Many cloud providers and software suppliers bill in US dollars while most UK SaaS companies earn in sterling, so a weaker pound raises cost of sales even though nothing about the product has changed. Removing unused resources, reserving capacity where usage is predictable and renegotiating contracts as volumes grow all bring the bill down, while a clear view of the currency exposure helps you plan pricing and budgets around it. - Support-heavy onboarding and misplaced costs:
A product that needs a lot of hands-on help to set up pushes support costs up. Better documentation, clearer onboarding and fixes for the issues that generate the most tickets reduce that load and improve the customer experience at the same time. It is also worth checking that commissions or product salaries have not been included in cost of sales by mistake before treating a low figure as a real problem. - Pricing that has not kept up:
Prices left unchanged for several years or packages that no longer reflect the value customers get hold the margin down as costs rise. Reviewing them can lift margin more quickly than cost savings alone.
Using a good SaaS gross margin to plan your next stage
A good SaaS gross margin gives a founder more than a strong line in the board pack. It shows how much of each new pound of revenue the business can reinvest, how quickly it can reach profit and how investors are likely to see it when the next round comes.
At Rise Accounting, we work with tech start-ups and SaaS founders to set up cost of sales on the basis investors expect, reconcile it to the statutory accounts and track margin month by month so there are no surprises in due diligence. If you would like a second view on how your margin is built or where it could improve, our team would be happy to look at it with you. Book a free consultation today!
Frequently asked questions
Is a 60% gross margin bad for a SaaS company?
Not necessarily, particularly for an early-stage business or one with a large services element. Investors will want to see the subscription margin on its own and a clear plan for how the total improves as the company grows.
What is the difference between gross margin and contribution margin?
Gross margin deducts the direct costs of delivering the product, which for many SaaS businesses includes payment processing fees. Contribution margin goes further and also deducts variable costs tied to winning each customer, such as sales commissions, to show what each customer or product line contributes towards fixed overheads.
Is gross margin the same as markup?
No, although the two use the same figures. Gross margin divides gross profit by revenue, while markup divides it by cost, so an 80% gross margin is the same as a 400% markup on cost of sales.
Does gross margin affect how investors value my SaaS business?
Yes, it is one of the measures investors look at most closely when valuing a SaaS company. A higher margin means more of each pound of revenue can fund growth or become profit, which generally supports a stronger valuation.
How often should I review my SaaS gross margin?
Monthly is best, as part of your management accounts, with a fuller review each quarter alongside the board pack. Tracking it every month lets you spot a rising cost, such as a jump in AI usage or a weaker pound, well before it shows up in the year-end accounts. If you would like help setting this up, feel free to reach out to us.
Matt co-founded Rise Accounting and leads the firm’s corporate finance and FinOps strategy practice. He works closely with startups and scale-ups navigating funding rounds, financial planning and investor readiness. Before Rise, Matt built deep expertise across financial modelling, cash flow management and growth-stage advisory.
