CHEAT SHEET

The Ultimate Subscription Gross Margin Cheat Sheet

Unlike most other SaaS metrics, subscription gross margin can be pretty tough to improve. Our cheat sheet explains why and will give you all the basics you need to know about this important SaaS metric, including why it matters and how to calculate it for your business.

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Subscription gross margin: A core indicator of profitability

Revenue isn't the only measure of a SaaS company's success. Profitability matters, too. And in SaaS, that’s measured in terms of subscription gross margin.

Subscription gross margin is the single most important metric for determining profitability for a SaaS business. The higher your gross margin, the more profitable and sustainable your business model becomes.

This cheat sheet distills everything you need to know about subscription gross margin, into a single page, explaining what it is, why it matters, along with:

The formula for subscription gross margin and an example calculation
The most common expenses that impact a SaaS company’s gross margins
Industry benchmarks for SaaS companies across different ARR ranges

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You begin by setting the timeline for historical data and forecasts. The model operates on a monthly basis, with the annual figures automatically calculated.

Next, you input assumptions for key metrics like leads, expansion, and income statement assumptions (G&A, S&M, and R&D).

The customer control tab helps you manage customer related information – beginning, new, churned, and ending customers. This is a corkscrew model where the beginning customers of the next month are the ending customers of the previous month.

Add the assumptions for conversion rates for pipeline to MQL, MQL to SQL, and SQL to deals based on your historical data to get new customers acquired per month.

Add assumptions around churn basis customers available to renew every month. This template assumes that you sign annual contracts with your customers. However, you can easily change the forecast formula in case the default one doesn’t work for you.

In the P&L tab you will see your income statement, which includes revenue from customer control, cost of goods sold (COGS), and operating expenses, leading to a final EBITDA calculation.

Finally, in the dashboard tab you can see various charts giving you a clear visual overview of your company’s financial health – ARR waterfall, GRR vs. NRR, and LTV to CAC ratio.

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"Gross margin is a reflection of how valuable a dollar of revenue is to the business… Margin is one of the main reasons a $10 million revenue company can be more valuable than a $100 million revenue company."

David Cummings

CEO of Atlanta Ventures

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The Ultimate Subscription Gross Margin Cheat Sheet

Subscription gross margin: A core indicator of profitability

Do you really know how profitable your SaaS business is?

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