SaaS gross margin is revenue minus cost of goods sold (hosting, support, payment fees, third-party software and AI inference), divided by revenue. The 2026 Aleph and Benchmarkit report put the 2025 median at 80% on software revenue and 76% on total revenue, with the top quartile above 86%. AI-native products typically run between 25% and 60%.
Key takeaways
- Gross margin = (Revenue − Cost of goods sold) ÷ Revenue × 100.
- Traditional SaaS: 80% software median (2025). Usage-only pricing: 62%. AI products: often 25% to 60%.
- Physical subscriptions run much lower. A cafe coffee club might sit near 40%.
- Higher gross margin means a higher revenue multiple when you sell.
- Every 'unlimited' or free extra you include is a gross margin decision.
Close.com is a CRM built for startups. When it launched, its plans included unlimited free phone calls.
Customers loved it. Of course they did. Unlimited calls, included in the price.
But every one of those calls cost Close money. The more customers used the feature, the more each customer cost to serve. So after a while, Close pulled calls out of the plan. Users paid the monthly subscription and then paid per call on top.
I included this story in the moats chapter of The Subscription Playbook, as part of an exercise: calculate your gross margin, then ask whether there's anything included in your price that shouldn't be.
That question matters more in 2026 than it did when I wrote it. Back then, the "unlimited phone calls" problem was rare in software. Now every product with an AI feature has it.
What is gross margin?
Gross margin is the percentage of revenue left after you subtract the direct cost of delivering what customers pay for.
It's the money available to pay for everything else: building the product, marketing, rent, salaries outside delivery, and profit.
How do you calculate SaaS gross margin?
This is the formula I used in the book:
Gross margin % = (Total revenue − Cost of goods sold) ÷ Total revenue × 100
The hard part isn't the arithmetic. It's deciding what goes in cost of goods sold (COGS).
| Business | What belongs in COGS |
|---|---|
| SaaS | Hosting and cloud, customer support, payment processing fees, third-party software and APIs, DevOps, AI model and inference costs |
| Gym or studio | Payment fees, cleaning, towels and consumables, floor-staff and instructor time, equipment maintenance |
| Cafe coffee club | Coffee beans, milk, cups, a share of barista time, payment fees |
| Subscription box | Product cost, packaging, fulfillment, shipping, payment fees |
Rent, head office salaries, marketing and product development are not COGS. They're operating expenses.
Worked example: a SaaS company adding AI
A B2B software company has $1,000,000 in annual revenue. Its direct costs:
- Hosting and cloud: $60,000
- Customer support: $90,000
- Payment processing: $30,000
- Before AI, COGS = $180,000, so gross margin = 82%
Then it launches an AI assistant inside every plan at no extra charge. Model and inference costs run $120,000 a year.
- New COGS: $300,000
- New gross margin: 70%
Revenue didn't change. The business just got 12 points less profitable at the gross level, and every future customer carries the same cost.
That's the Close.com lesson, AI edition. If you're pricing an AI product, the AI gross margin guide and the free calculator below go much deeper.
AI Gross Margin CalculatorModel token costs, heavy users and margin for an AI product.Open the free tool →What is a good gross margin for a SaaS company?
The 2026 Aleph and Benchmarkit SaaS & AI Performance Benchmarks (full-year 2025 data, 342 companies) give the clearest current picture:
| Measure | 2025 figure |
|---|---|
| Median software gross margin | 80% |
| Median total-revenue gross margin (including services) | 76% |
| Top quartile, software | 86% or more |
| Bottom quartile, software | 50% |
| Usage-only pricing models | 62% median |
| Companies under $5M ARR | 72% median |
| Companies with $50M to $100M ARR | 86% median |
Two other data points worth knowing:
- SaaS Capital's 2026 survey of more than 1,000 private B2B SaaS companies found median costs of 5% of ARR on hosting, 4% on DevOps, 5% on professional services delivery and 3% on other COGS, plus 9% on customer support and success. Add them up and you get a gross margin in the mid-70s to low-80s, depending on how much of support you count.
- Kyle Poyar's 2025 SaaS Benchmarks with High Alpha (more than 800 companies) found early-stage gross margins down nearly 10 points year on year, likely driven by AI costs, and AI-native startups running about 5 points lower than their SaaS peers.
Aleph and Benchmarkit found the median software margin held at 79% to 81% across four years, so AI hasn't dented the typical SaaS company yet. The pressure is concentrated in newer, AI-heavy products.
What gross margin do AI products have?
Much lower, and much more varied.
- Bessemer's State of AI 2025 found its fastest-growing "Supernova" AI companies averaged about 25% gross margin, "often negative," against about 60% for steadier "Shooting Stars."
- ICONIQ's 2026 State of AI report (summarized by SaaStr) put average AI-product gross margin at 45% in 2025, projected to reach 53% in 2026.
- Some well-known AI tools have reportedly run negative margins at times. A gross margin of -23% was reported for Cursor for the quarter to January 2026.
If you're building on someone else's model, you're living on their pricing. The fix is usually a pricing change: credits, usage caps or a hybrid base-plus-usage model so your heaviest users pay for what they use.
Model your AI product's margin
Token costs, heavy users and price per seat: the free AI Gross Margin Calculator shows where your margin lands.
How should a gym or cafe think about gross margin?
Physical subscriptions will never hit software margins. That's fine. You just need to know your number before you set a price.
Worked example: a cafe coffee club (illustrative)
A cafe sells a monthly coffee club for A$44 including GST (A$40 ex GST). The average member drinks 20 coffees a month. Each coffee costs about A$1.10 in beans, milk and cup, plus about A$0.10 in barista time and payment fees.
- COGS per member: 20 × A$1.20 = A$24
- Gross profit: A$40 − A$24 = A$16
- Gross margin: 40%
If heavy members start drinking 30 coffees, COGS rises to A$36 and margin falls to 10%. That's why "unlimited" coffee needs a daily limit, a lesson Panera learned the hard way. See the Panera Unlimited Sip Club case study.
A gym usually does much better, often 70% or more, because one more member barely changes the cost of running the floor. The risk there is capacity, not margin.
Hardware businesses can lift their blended margin by adding a subscription. GoPro's 2025 results showed its subscription business cost about 30 cents to deliver per dollar of revenue, against about 73 cents per dollar of camera revenue. The GoPro case study shows how that subscription held steady while camera sales fell.
Why does gross margin matter for valuation?
In the MOATS chapter, high gross margin is one of the 11 moat factors. As I put it in the book: "having a higher percentage means your business trades at a higher price/revenue multiple."
The example I used was realestate.com.au, which in 2021 generated $1 billion of revenue with a 92% gross margin and a 47% operating margin. Businesses like that are very hard to attack, because they have so much margin to spend defending themselves.
When buyers look at your business, they don't just ask how much revenue you have. They ask how much of it you keep. The valuation multiples guide covers how margin feeds into price.
Free Subscription Profit Review
Australian business owners can book a free 30-minute review with a BPAG Accountants adviser. An honest conversation about:
- whether a subscription model could work for your business
- how recurring revenue could cover your fixed costs each month
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No cost, no obligation. General information only until we understand your situation.
What are the common gross margin mistakes?
- Leaving support out of COGS to make the margin look better. Benchmarks assume it's in.
- Including GST or sales tax in revenue. It isn't your money.
- Hiding AI costs in R&D. Inference that serves customers is COGS.
- Using blended margin when one segment is losing money. Check margin by plan and by customer size. Heavy users on flat plans are where margin disappears.
- Ignoring the gap between software and services. Aleph and Benchmarkit found a 4-point gap at the median between software and total margin. A wider gap means services are dragging you down.
How does gross margin link to the other metrics?
Gross margin flows into nearly every number on this site. It's in your lifetime value (LTV uses gross profit, not revenue). It's in your CAC payback (payback uses monthly gross profit). It sets the ceiling on the profit half of the Rule of 40.
Lift margin by five points and every one of those numbers improves at once.
What should you do next?
Do the exercise from the book, updated for 2026:
- Calculate your gross margin, ex GST, with support and AI costs in COGS.
- List everything included in your price that costs you money per customer.
- For each item, ask: should this be an add-on, a usage charge or a higher tier?
Then run your new price through the subscription price calculator to check it still covers costs, GST and fees.
Frequently asked questions
Is customer support part of cost of goods sold?
For most SaaS companies, yes. Support that keeps the product working for existing customers is a cost of delivering the service. Customer success aimed at upselling is often booked under sales and marketing instead. Investors expect support in COGS, so if you leave it out, say so when you quote your margin, or your number won't compare with benchmarks.
What's the difference between gross margin and contribution margin?
Gross margin subtracts only the direct cost of delivering the product. Contribution margin also subtracts other variable costs that rise with each customer, such as sales commissions or per-customer marketing. Contribution margin is lower and tells you what each extra customer adds to covering fixed costs. Both are useful, but published SaaS benchmarks use gross margin.
Should GST be included when calculating gross margin?
No. In Australia, GST you collect belongs to the ATO, not to you, so calculate revenue and costs ex GST. Including it inflates revenue by 10% and distorts every ratio built on it. The same applies to VAT and sales tax elsewhere. Payment processing fees, on the other hand, are a real cost and should be in COGS.
Why do investors care so much about gross margin?
Because it caps everything else. A business with an 85% margin has 85 cents of every dollar to spend on product, sales and profit. One at 45% has 45 cents. As I wrote in The Subscription Playbook, a higher gross margin means your business trades at a higher price-to-revenue multiple, so the same revenue is worth more.
How do AI companies improve gross margin?
The main levers are routing simple tasks to cheaper models, caching repeated prompts, building or fine-tuning their own models, and charging for heavy use with credits or usage-based pricing instead of flat unlimited plans. ICONIQ's 2026 survey found only 15% of consumption-priced AI companies absorb all inference cost themselves. The rest pass at least some on.
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Robert Coorey, MBA
Robert is the author of The Subscription Playbook and Feed a Starving Crowd and a Director at BPAG Accountants in Sydney. More about Robert.
Sources
- Aleph and Benchmarkit, What's a good SaaS gross margin? (2026 report, full-year 2025 data)
- SaaS Capital, 2026 Spending Benchmarks for Private B2B SaaS Companies
- Bessemer Venture Partners, The State of AI 2025
- SaaStr, 10 metrics from ICONIQ's 2026 State of AI report (10 Jul 2026)
- GoPro, fourth quarter and full-year 2025 results (5 Mar 2026)
- Kyle Poyar, Growth Unhinged: the 2025 SaaS Benchmarks report (Nov 2025)
Facts and prices checked 27 October 2026. Spotted something out of date? Tell us.