The line that moves your valuation
Get COGS wrong and your gross margin goes with it.
A good investor looks at gross margin. If the costs underneath it are misclassified, the number is wrong, and a company can be priced at half what it is worth — or at twice.
SaaS COGS and gross margin
Gross margin
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Investor-grade margin.
Above 80% is the territory where scaling is cheap and a valuation multiple is defensible. Keep watching the AI line: an "unlimited" tier can quietly invert this under heavy usage, and the month you find out is a month too late.
Respectable, and short of the benchmark.
Investors like SaaS above 70–80%. Between 60 and 80 the usual culprits are support headcount scaling with customers, and an AI or API bill that grows with usage rather than with price. Both are fixable, and both are structural rather than a matter of finding a cheaper vendor.
This is not priced as software.
Below 60%, the market reads the company as a service business with software attached, and prices it on revenue multiples a fraction of a SaaS one. Either the cost of delivery is genuinely too high, or services revenue is sitting in a line that says subscriptions. Both are worth finding out before someone else does it in a data room.
- Revenue
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- Total COGS
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- Gross profit
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- Difference the reclassification makes
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If the margin is the problem, the fix is structural
Breaking the link between headcount and revenue is the work — and it is operating work, not an accounting exercise. Bring the number to a call and we will find where it actually leaks.
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