At what revenue level is SaaS gross margin reasonably calculated (i.e. what scale)?

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JASON LEMKIN

SaaS Gross Margins “at scale” is a concept that a few years ago probably didn’t matter.

Pure software delivered over the internet generally should have 80%+ gross margins if it requires limited customer support. Because shifting bits costs almost nothing. 70%+ if it requires onboarding and more support. And worst case, 60%+ if it has a large professional services component.

And really you should have those margins almost on Day 1.

But these days, we are seeing more software plus services models. Twilio’s recent IPO is a perfect example. Or RainforestQA, which has 50,000 crowdsourced QA testers underlying its QA-as-a-service model. Here, the services do have true, actual costs. We also are seeing more and more software-with-a-hardware component models.

These models often have lower gross margins, due to the additional “costs” of the service / hardware. That often will push margins down to the 5X% at scale, and in the early days, the margins can be much lower as you drive down those additional closts.

So if you are software enabled services, or software + services, or software + hardware, it’s also important to model out Gross Margins at Scale.

I’ve generally learned and found start-ups are terrible at this. Tell me your actual margins today, and then as goals and targets, what they should be in 12, 24 and 24+ months. If your hard costs get distributed over more users, or your hard costs come down as you scale, etc. … that should bring up your GMs over time.

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Published on August 10, 2016
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