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Hey {{first_name}} 👋, hope you had a great week! In the last issue, we discussed why tracking FCF matters, and now we are moving with the next topic from Financial Metrics content.

Let’s talk about ⬇️

I had a call last month with a SaaS founder doing $12M ARR.

Sharp guy. Confident in his numbers. Quoted me a gross margin of 84% in the first five minutes.

When I actually pulled apart his COGS, the real number was 71%.

He'd been telling investors 84% for three quarters straight.

That's the kind of mistake that doesn't just embarrass you in due diligence — it tanks your credibility with people you spent months trying to win over. And it happens far more often than founders realize.

Here's the thing about gross margin: the formula is the easy part. What separates founders who quote it correctly from founders who don't is one thing — knowing exactly what belongs inside COGS, and what doesn't.

Today I'm walking you through how to actually get this right.

Let's dig in:

1️⃣ What Gross Margin Actually Measures

2️⃣ What Belongs Inside SaaS COGS

3️⃣ What "Good" Looks Like

4️⃣ The Two Classification Mistakes That Wreck Your Margin

5️⃣ The Bottom Line

Gross margin is the percentage of revenue you keep after covering the direct cost of delivering your product.

The formula:

Quick example: $1.5M in revenue, $360K in COGS = 76% gross margin. You keep 76 cents of every dollar. The other 24 cents goes to actually delivering the product.

The part most founders get wrong: gross margin only counts direct costs of delivery. Sales commissions, marketing spend, admin salaries, rent — none of that belongs here. Those are operating expenses, and they sit below the gross profit line.

Mix the two up and your number is fiction.

In manufacturing, COGS is clean: raw materials, direct labor, production overhead. SaaS is messier — and the mess is where founders trip.

Here's what typically belongs in SaaS cost of revenue:

The trickiest one is people. Here's the rule I use with my clients:

If a CS team is purely focused on retention and support → COGS. If that same team is also doing upsells and lead conversion → split allocation, with a portion shifting into sales and marketing.

That kind of split-allocation discipline is exactly what acquirers and seasoned VCs zero in on during diligence. Get sloppy here and a 78% gross margin you've been quoting can suddenly look like 68% under real scrutiny.

I'm Aleksandar, fractional CFO at Fiscallion, where we help founders like you achieve financial clarity, streamline reporting, and build investor-ready forecasts.

Ready to level up your finances?

SaaS gross margins are some of the highest of any industry. Here's the benchmark grid I share with founders:

For context, here's how that compares to other industries: auto and trucks sit around 9%. Restaurants run around 28%. Household products hover near 51%. SaaS lives in 75–90%+ territory because the marginal cost of delivering software is fundamentally lower than delivering physical goods.

What this actually means for your business: higher gross margin = more room to fund product, marketing, and growth investments. Two SaaS companies with identical $10M ARR but a 20-point margin gap are not the same business — and the market doesn't price them like they are.

Because there's no strict standard for what counts as SaaS COGS, I see two specific mistakes constantly:

Mistake #1: Stuffing OpEx into COGS. Sales commissions, marketing spend, or admin salaries get rolled into cost of revenue. Gross margin gets deflated. The business looks weaker than it is. Pricing and hiring decisions get made on bad data.

Mistake #2: Pulling COGS out of COGS. Direct delivery costs — like a portion of CS payroll — get bumped down into OpEx. Gross margin gets artificially inflated. The number looks great on the surface, but anyone running real diligence will spot the inflation in 15 minutes.

That second one is worse. A deflated margin makes you look weak. An inflated margin makes you look dishonest. One of those is recoverable. The other isn't.

The fix is documentation: write down a clear COGS policy, apply it consistently, and revisit it quarterly as the business evolves. Manual spreadsheet tracking introduces even more error — automation reduces the risk substantially.

Gross margin isn't just a profitability number. It's a credibility signal.

When you can walk into a board meeting or investor conversation and explain exactly what's inside your gross margin — what's classified where, why, and how it's trending — you stop being on the defensive. You start driving the conversation.

The strongest finance teams I work with track gross margin monthly, segment it by product line and customer cohort, and use it as a strategic narrative tool. Not just "here's our number." But: "here's why our number is what it is, here's where it's headed, and here's what that means for the business."

That kind of clarity does more for your valuation than almost anything else you can build.

Hit reply and tell me your current gross margin — and whether you're confident in what's inside it. I read every response, and I'm building a benchmark dataset across SaaS companies at $5–100M ARR. If you share yours, I'll send back where you stack up against the rest of the cohort.

Chat soon,

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