Gross margin — which is a company’s total sales revenue minus cost of goods sold — can be considered an equalizer across businesses with different business models, where comparing relative revenue would otherwise be somewhat meaningless. Gross margin tells the investor how much money the company has to cover its operating expenses and (hopefully!) drop to the bottom line as profitability.
A few examples to illustrate the point: E-commerce businesses typically have relatively low gross margins, as best exemplified by Amazon and its 27% figure. By contrast, most marketplaces (note here the distinction between e-commerce) and software companies should be high gross-margin businesses.
Paraphrasing Jim Barksdale (the celebrated COO of Fedex, CEO of McCaw Cellular, and CEO of Netscape), “Here’s the magical thing about software: software is something I have, I can sell it to you, and after that, I still have it.” Because of this magical property, software companies should have very high gross margins, in the 80%-90% range. Smaller software companies might start with lower gross margins as they provision more capacity than they need, but these days with pay-as-you-go public cloud services, the need for small companies to buy and operate expensive gear has vanished, so even early stage companies can start out of the gate with relatively high gross margins.
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