Estimate your cloud infrastructure costs and see how they scale with customers. Model hosting, database, CDN and third-party API costs per customer to understand your true gross margin floor.
SaaS companies need gross margins of 70-85% to fund the R&D, sales and marketing required to scale. Infrastructure costs — hosting, database, storage, CDN and third-party APIs — sit within COGS and directly reduce gross margin. Understanding your infrastructure cost per customer and how it scales is essential for achieving the margins that justify SaaS multiples.
Best-in-class SaaS targets infrastructure below 10% of ARR. 10-20% is acceptable. Above 20% is concerning and will limit gross margin and valuation multiples. AI-native SaaS often has higher infra costs due to model inference costs (sometimes 30-50% of revenue), which is increasingly accepted as long as gross margin is above 50% and improving with scale.
SaaS infrastructure has a partially fixed, partially variable cost structure. Compute, database and monitoring have significant fixed components that spread across customers as you scale. Storage and CDN scale more linearly. Most SaaS businesses see infrastructure as % of revenue decline from 20%+ at early stage to 8-12% at scale — a natural gross margin improvement that should be planned for in financial models.
Target: under 10% of ARR is excellent, 10-15% is good, 15-25% is acceptable for early stage, above 25% is concerning for mature SaaS. AI/ML-intensive products typically have higher infrastructure costs (15-35%) due to compute costs for model inference. The key metric is whether infrastructure costs are declining as a % of revenue as you scale — this improvement is the primary driver of gross margin improvement in most SaaS businesses.