Software Growth

Operating margin

Operating margin is operating income as a percentage of revenue, after both COGS and operating expenses like R&D, sales and admin.

Operating margin shows how much profit is left from each revenue dollar after paying for everything it takes to run the business: delivery costs, product development, sales, marketing and admin. It is checked before interest and taxes, so it reflects the business itself, not its financing.

How to calculate operating margin

Operating income is also called EBIT. Baremetrics gives the same formula, sales revenue minus COGS minus operating expenses.

Example: revenue is $400,000, COGS is $100,000, and operating expenses (R&D, sales and marketing, general and admin, including $20,000 of depreciation and amortization) are $270,000.

Where it sits

  • Gross margin (75% in the example) is before operating expenses.
  • Operating margin (7.5%) is after them.
  • EBITDA margin adds depreciation and amortization back, so it is higher: $50,000 over $400,000 is 12.5%.

What good looks like

It depends heavily on stage. Bessemer's benchmark data for cloud companies shows typical R&D, sales and marketing, and G&A spending as large shares of revenue, with S&M about half of revenue at $100 million of ARR, which is why growth-stage companies often run negative operating margins. Mature SaaS businesses reach positive margins. There is no single right figure, so compare yourself with companies of similar size and funding.

Why it is not the same as cash

Operating margin is an accounting measure. Bessemer notes cloud businesses typically show positive free cash flow long before they turn EBIT positive, because customers pay up front while costs like amortization are spread out. A company can have a negative operating margin and still generate cash.

For small SaaS

  • Include a real founder salary, or your margin is flattering.
  • Track it by quarter. Annual license renewals and one-off costs make single months noisy.
  • If you use the Rule of 40, say which margin you plugged in, since operating margin gives a lower score than EBITDA or FCF margin.

Sources

Back to the SaaS glossary