Gross MarginvsRevenue

Gross margin is the percentage of revenue left after subtracting the direct costs of delivering your product (Cost of Goods Sold / COGS). For SaaS, COGS includes hosting, customer support, and payment processing — typically leaving 70-85% gross margins. For e-commerce, COGS includes product costs, shipping, and packaging — typically 30-50% margins. Gross margin determines how much money you have to invest in growth (sales, marketing, R&D). A SaaS company with 80% gross margins has $0.80 per revenue dollar for growth; a hardware company with 30% margins has only $0.30.

Revenue is the total income generated from selling your product or service before any expenses are deducted. It is the top line of your income statement and the first number investors look at. Revenue quality matters as much as revenue quantity: $1M in recurring subscription revenue is worth 8-15x as a valuation multiple, while $1M in one-time services revenue is worth only 1-3x. Slack grew to $12M ARR before raising its Series A because they focused on revenue quality — recurring, low-churn enterprise contracts — not vanity revenue spikes.

The trap is miscategorizing expenses to inflate gross margin. Some companies exclude customer success, onboarding, or infrastructure costs from COGS to make gross margins look SaaS-like (75%+) when they're really services businesses (50-60%). VCs see through this immediately. If your 'SaaS' has 55% gross margins, you're not a SaaS company — you're a services company with a software wrapper. The valuation difference is 3-5x.

The trap is celebrating revenue growth while ignoring the cost of generating it. A startup doing $1M in revenue but spending $1.5M to get there is dying — it just doesn't know it yet. Revenue is vanity; profit is sanity; cash is reality. Also, one-time revenue spikes (viral launches, seasonal sales, a single large contract) are not sustainable growth. If you strip out the spikes, what's your underlying recurring revenue trend?

Calculate gross margin honestly: include ALL costs directly related to delivering your product to one more customer. For SaaS: hosting/infrastructure, payment processing, customer support, DevOps. Formula: Gross Margin = (Revenue − COGS) ÷ Revenue × 100. Target: 70%+ for SaaS, 50%+ for marketplace, 30%+ for e-commerce. Track monthly and investigate any decline — it usually means infrastructure costs are scaling faster than revenue.

Track revenue by three dimensions: (1) Source: organic vs paid vs referral — know which channels actually generate revenue, not just traffic. (2) Type: recurring vs one-time — only recurring revenue drives SaaS valuations. (3) Cohort: does each monthly cohort's revenue grow, stay flat, or shrink over time? If older cohorts are shrinking, you have a retention problem hidden by new customer acquisition.