Metric guide · Cash and margin
Gross margin
Short answer
Gross margin is the share of revenue left after paying the direct costs of delivering the product. It is calculated as revenue minus cost of revenue, divided by revenue. For software and subscription apps, cost of revenue includes hosting, app store and payment fees, third-party services per user, and any people who deliver the service itself.
The formula
Gross margin = (revenue − cost of revenue) ÷ revenue × 100
Unit: Percent. Better when it goes up.
How to calculate it
- Take revenue for the period from your accounting system.
- Sum the costs of delivering the product: hosting, app store commissions, payment processing, per-user third-party services and delivery staff such as coaches or support tied to the service.
- Subtract cost of revenue from revenue and divide by revenue.
- Keep the same cost categories every period so changes reflect the business, not reclassification.
Mistakes that distort it
If revenue is recorded at gross price, store commissions are a cost of revenue. Leaving them out overstates margin.
Engineering work on new features is an operating expense, not a delivery cost. Including it understates gross margin.
Costs that scale with each user's activity belong in cost of revenue, even if they are billed as a software subscription.
Where Sondola reads it from
Sondola reads this metric from QuickBooks Online and Xero, with the source and period on every reading. Each reading keeps where it came from, the period and the date it was recorded, and you can download all of it at any time.
See all 34 integrations →Questions
Is gross margin the same as contribution margin?
No. Contribution margin subtracts every cost that varies with each customer, which can include costs kept out of cost of revenue. Gross margin covers only the direct cost of delivering the product.
Why does gross margin matter for payback?
Payback and LTV are only as reliable as the margin behind them. Using revenue instead of margin makes both look better than they are.
Related metrics
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