Revenue tells you how big your startup looks. Gross margin and contribution tell you whether it can actually pay for itself. These two numbers decide how much you can afford to spend to win a customer, how fast you can grow, and whether each sale leaves you richer or poorer. Most first-time founders track revenue closely and these two barely at all, which is exactly backwards.
Gross margin, and why to measure it net of GST
Gross margin = (Revenue minus Cost of Goods Sold) divided by Revenue. COGS is the direct cost of delivering what you sold: cloud hosting and support for software, or product, packaging and shipping for physical goods. It excludes salaries, rent, and marketing.
In India, measure revenue net of GST. The GST you collect is not your money, it is collected on behalf of the government and is excluded from turnover. The GST you pay on inputs is generally recoverable as input tax credit, so it should not sit inside COGS either. Using GST-inclusive figures inflates both revenue and cost and distorts your margin.
Benchmarks by business model
A "good" gross margin only means something inside your own model. Compare like with like:
- Software and SaaS: healthy is 70% to 85%, with 80% or higher considered best in class. Pure self-serve software can reach about 85%. Add heavy implementation or professional services and it falls toward 65%, and managed services can pull it near 50%.
- Marketplaces and platforms: typically 40% to 60%, because payment processing and platform costs are real. Take rates run from low single digits for commodity marketplaces up to 25% to 30% for highly differentiated ones.
- E-commerce and D2C: physical goods run lower. Retail sits around 25% and e-commerce roughly 30% to 50%. D2C brands may start at 50% to 70% before fulfilment, but net contribution often lands at 15% to 35% once shipping, returns, and support are counted.
So 55% is excellent for a D2C brand and weak for pure SaaS. Benchmark within your model, not across.
Contribution margin per customer
Contribution margin per customer = selling price minus variable costs. Variable costs are the ones that rise with each additional sale. For a D2C order that means product cost, packaging, forward and return shipping, expected RTO (return to origin) on cash-on-delivery orders, and payment gateway fees, all measured net of GST. What remains contributes to covering your fixed costs (salaries, rent, tools) and then profit.
A quick example. An order sells at Rs 1,200 net of GST. Product Rs 400, packaging Rs 40, forward shipping Rs 90, gateway Rs 25, and expected returns and RTO Rs 120. Variable cost is Rs 675, so contribution is Rs 525, a contribution margin of about 44%. That Rs 525 is all you have to fund marketing and everything fixed.
Why contribution drives operating decisions
Gross margin is the ceiling on what your model can ever afford. Contribution per customer is the number you steer with week to week.
- Break-even: fixed costs divided by contribution per unit tells you how many sales you need before you make a rupee of profit.
- Acquisition spend: you can only spend up to the contribution a customer generates, counting their repeat purchases, and still make money. If contribution is Rs 525 per order but acquisition costs Rs 900, you lose money unless the customer buys again.
- Pricing and mix: push high-contribution products, and fix or drop the negative ones. A discount that looks small on price can erase contribution entirely.
- Accepting an order: any price above variable cost still adds contribution, useful for filling spare capacity. Never sell below variable cost, because every unit then deepens your loss.
Track contribution before you obsess over net profit. A business growing fast on negative contribution is simply losing money faster.