I can’t tell you how many times I’ve seen companies with 90%+ Gross Margins but 3 year CAC Payback Periods that destroy those margins. Gross Margins are one of the most misrepresented metrics inside B2B companies.
Gross Margin is viewed as Revenue less Cost of Goods Sold. In software, the cost of goods sold are marginal (discounts, affiliate fees etc.) that are directly connected to the sale of a product.
With this kind of a calculation, Gross Margins looks to be 80-90%+ in most cases.
While this is “financially” accurate, it completely misses the mark on the actual cost of that revenue. It specifically misses variable costs like paid media spend or even sales spend that are essential to acquiring the revenue.
This is why seemingly great companies with great gross margins on paper keep needing to raise capital / go out of business.
The way to fix this: constantly look at Gross Margins with CAC factored in as an additional lens to understand the cash flow viability + what is working and not working inside of a business.
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