What is Gross Margin?
Definition
The percentage of subscription revenue remaining after deducting the direct costs of delivering the service.
Understanding Gross Margin
Gross margin reveals how efficiently a subscription business delivers its service. For SaaS companies, gross margins typically range from 70-85% because software has low marginal delivery costs. Streaming services have lower margins (30-50%) due to content licensing costs.
Payment processing fees, hosting costs, and customer support are typical cost of goods sold (COGS) for subscriptions. High gross margins indicate that a business can sustain or reduce subscription prices while remaining profitable. For consumers, services with lower gross margins may be more likely to raise prices.
Related Terms
Recurring Revenue
Income that a business can reliably expect to receive at regular intervals from active subscriptions.
Unit Economics
The direct revenues and costs associated with a single subscriber, used to determine the profitability of each customer.
Subscription
A recurring payment arrangement where a customer pays at regular intervals to access a product or service.
Pricing Model
The strategy a subscription service uses to structure its pricing, including flat-rate, tiered, usage-based, or hybrid approaches.