In the early stages of a startup’s development, growth and customer acquisition take center stage. However, by the time you reach series C, investor priorities shift — they’re no longer just looking at how fast you’re growing, but whether you’re actually making money. That’s where gross margin comes into play – a key indicator of operational profitability.
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What Is Gross Margin?
Gross margin is the percentage or amount that remains after subtracting the cost of goods sold (COGS) from revenue. COGS includes all direct costs associated with producing a product or delivering a service — such as consultant salaries, software licenses, and cloud infrastructure.
👉 Example:
If you sell a service for 1,000 PLN and it costs you 400 PLN to deliver it, your gross margin is 600 PLN, or 60%.
Why Is Gross Margin So Important?
- It shows the actual earnings from your core business activities.
- It helps assess the operational efficiency of your business model.
- It gives a clear picture of how much is left of the profit to cover fixed costs – such as marketing, R&D, and administration.
Unlike revenue, which can look impressive on paper, gross margin reveals whether the company is actually making money. Many startups achieve spectacular top-line growth but barely break even due to low gross margins. A lack of control over COGS is often what stalls further growth and turns investors away.
Gross Margin Across Different Business Models
- SaaS: Gross margins typically range from 70–90+% due to low variable costs.
- Service-based companies: Margins usually fall between 30–60%, depending on how efficiently services are delivered.
Regardless of the industry, a declining gross margin is a red flag — it may indicate rising costs, poor pricing strategy, or the need to rethink your operational model.
Real-World Example: Uber and the “Underwater” Strategy
For many years, Uber invested billions in expansion while operating with a negative gross margin. The goal was to capture market share before shifting focus to profitability. That strategy eventually paid off — the company ultimately began generating solid profits.
This shows that a low gross margin isn’t always a mistake — but it must be a conscious decision, not the result of operational chaos.
When Is a Low Gross Margin Acceptable?
- At the beginning of a business, while entering the market
- For reference projects with large, high-profile clients
- When building a portfolio and gaining market trust
- As part of a conscious short-term loss vs. long-term gain strategy
How to Improve Gross Margin – A Startup Checklist:
- Analyze and properly classify COGS vs. operational expenses
- Explore automation opportunities (e.g., AI in customer support)
- Review your cloud infrastructure – look for cost-saving options
- Assess the effectiveness of your delivery team (implementation, design)
The Role of an External CFO in Managing Gross Margin
An external CFO can help by:
- Accurately classifying costs (what counts as COGS vs. fixed expenses)
- Calculating gross margin across the entire company, product lines, and individual clients
- Identifying the most and least profitable areas of the business
- Advising on process optimization and resource allocation
- Providing data to support better operational decision-making
Summary
Gross margin is the barometer of a startup’s financial health.
Take care of it from day one. High margins provide room for growth, investment and safe scaling.
At incro, we help service-based businesses bring order to financial chaos. Our experts combine controlling, business intelligence, and strategy – acting as your external finance team.
💬 Book a free consultation: https://incro.us/contact/
