Gross margin and valuation: why revenue quality changes your multiple
Two companies, the same sales, very different value. Gross margin is the lens that measures the quality of your revenue.
By Crispa · 5 min read · Updated June 2026
The short answer: Gross margin measures the quality of your revenue, or how much of it you keep after the cost of delivering what you sell. At the extremes it is worth nearly double. Software businesses above 80% gross margin earn around 6.4x revenue, while those under 60% sit near 3.3x. Same sales, very different value.
This is the second of the four lenses. This piece is about one thing, what gross margin tells a buyer, and why it sets the ceiling for everything else.
What gross margin actually measures
In plain termsGross margin:Gross profit is what is left from your sales after the direct cost of delivering them, like hosting, support and payment fees. Gross margin is that gross profit divided by revenue, shown as a percentage. In short, it is how much of every sale you keep to fund everything else, so an 80% gross margin means you keep DKK 80 of every DKK 100 of sales after delivery costs.
It is the money you have to cover everything else, like sales, product, overhead, and finally profit. The higher it is, the more of every new sale reaches the bottom line.
How much of every DKK 100 of sales you keep
Each bar is DKK 100 of sales. The higher the margin, the more of every DKK 100 you keep to grow the business.
How much the multiple moves
Here is how the multiple climbs with margin.
Median EV/TTM revenue by cohort. Source: SEG 2026 Annual SaaS Report (4Q25 medians).
Why margin is really a bet on operating leverage
When someone buys your business, they are buying a machine that turns revenue into cash. Gross margin is the clearest early read on how good that machine is, and on whether it can grow without costs growing just as fast. A high-margin business adds customers far quicker than it adds cost. A low-margin one has to keep spending just to keep serving. That is why a thin margin drags down the whole valuation, not only this lens.
Real example: Pleo. Pleo has run a gross margin around 84–85% since 2022, right in the top band. That is the kind of unit economics that supports a premium multiple, even while the company is still spending hard to grow.
If your margin is lower than you want, the question is simple. Where is the cost going, and is it built into how you deliver, or just temporary? Margin is hard to fake and hard to fix fast, which is exactly why buyers trust it. Lift it a few points and you raise the ceiling on every other lens, from revenue growth to EBITDA margin and the Rule of 40.
Frequently asked questions
What gross margin do SaaS companies need for a premium valuation?
Above 80%. Software businesses with gross margins over 80% typically earn around 6.4x revenue, versus about 3.3x below 60%. That is nearly double for the same sales.
How does gross margin affect the revenue multiple?
Gross margin signals how much of each sale becomes profit as you scale. Higher margins mean more operating leverage, so buyers pay a higher multiple, roughly 3.3x under 60% rising to 6.4x above 80%.
Why do buyers care so much about gross margin?
Because they're buying a cash-generating machine. Gross margin is the clearest early indicator of how efficiently that machine converts revenue into profit, and whether it can scale without costs rising in step.