Gross margin is a very important metric for Software as a Service (SaaS) companies. It allows startups to fund large investments in product and sales during periods of rapid growth and be profitable when growth slows. Many factors contribute to a company’s ability to maintain high gross margin, including pricing discipline and power, a product that delivers high ROI for the customer, efficient and scalable infrastructure, and an easy to use product that requires little ongoing support by the vendor, to name a few. Gross margin has a significant impact on a company’s ability to invest in R&D, sales, and marketing, which may ultimately determine the winner in a competitive market. It is also an important valuation driver, which is why I am often surprised how little attention companies...

Gross margin is a very important metric for Software as a Service (SaaS) companies. It allows startups to fund large investments in product and sales during periods of rapid growth and be profitable when growth slows. Many factors contribute to a company’s ability to maintain high gross margin, including pricing discipline and power, a product that delivers high ROI for the customer, efficient and scalable infrastructure, and an easy to use product that requires little ongoing support by the vendor, to name a few. Gross margin has a significant impact on a company’s ability to invest in R&D, sales, and marketing, which may ultimately determine the winner in a competitive market. It is also an important valuation driver, which is why I am often surprised how little attention companies pay to gross margin in SaaS businesses. From what I’ve seen, founders have little appreciation of why gross margin matters until a startup reaches some scale. Venture capitalists often ignore it. Even public investors seem to overlook the importance of gross margin (though, not for long). In this post, I wanted to provide some additional insight on the impact gross margin has on a SaaS business.

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