Standard : Gross Margin Contribution

Description

Gross Margin Contribution measures the percentage of revenue left after subtracting the direct costs of delivering the product (e.g. hosting, support, fulfilment).

It is a core financial health metric for understanding how much revenue is available to fund R&D, sales, and growth initiatives.

How to Use

What to Measure

  • Total revenue in a given period.
  • Cost of goods sold (COGS) — direct costs to deliver the product.

Formula

Gross Margin (%) = ((Revenue − COGS) ÷ Revenue) × 100

Example: £100,000 revenue, £30,000 COGS → Gross Margin = 70%.

Instrumentation Tips

  • Ensure COGS is consistently defined (hosting, support, third-party fees).
  • Break down margins by product line for insight.
  • Reconcile to finance data monthly.

Why It Matters

  • Profitability health: Determines how much can be reinvested.
  • Pricing insight: Guides pricing strategy and cost optimisation.
  • Investor readiness: Key SaaS and product KPI.

Best Practices

  • Track margin trends over time and by cohort.
  • Monitor impact of cost-saving initiatives.
  • Use margin to guide product discontinuation decisions.

Common Pitfalls

  • Misclassifying costs (e.g. including R&D in COGS).
  • Ignoring variable costs like payment processing fees.
  • Looking at revenue growth without margin improvement.

Signals of Success

  • Gross margin remains stable or improves as revenue scales.
  • Higher margins correlate with sustainable growth.
  • Cost initiatives visibly impact margins.
  • [[Monthly Recurring Revenue (MRR)]]
  • [[Payback Period]]
  • [[Customer Lifetime Value (CLV)]]