Subscription Revenue Gross Margin is a key metric that helps SaaS businesses assess the profitability of their recurring revenue streams. The financial metric helps you measure the difference between the revenue generated from subscriptions and the direct service delivery costs. It is expressed as a percentage of the subscription revenue.
Here are a few reasons why Subscription Revenue Gross Margin s important in SaaS business.
Subscription Revenue Gross Margin is a profitability indicator: It is a crucial metric for determining the profitability of a SaaS company's core business. Therefore, the higher the margin, the better.
Scalability: Typically, SaaS businesses with high Subscription Revenue Gross Margins are more scalable. As its customer base grows, the incremental cost of service delivery to additional customers reduces. Thus, it allows the company to maintain or increase its margins as it scales.
Pricing strategy: Analyzing Subscription Revenue Gross Margin helps SaaS companies evaluate their pricing strategies. If the margin is too low, the company needs to adjust its pricing to better cover the associated costs of service delivery.
You can calculate Subscription Revenue Gross Margin using the following formula:
Subscription Revenue Gross Margin (%) = [(Subscription Revenue - Cost of Goods Sold (COGS)) / Subscription Revenue] x 100
A higher Subscription Revenue Gross Margin signals that a company retains a larger part of its subscription revenue as profit, even after accounting for the direct costs associated with service delivery.