1/n Why you should not always take SaaS gross margins at face value
2/n Gross margin is one of the most important financial metrics for a SaaS company, especially if it is loss-making
3/n Gross margin is an important input in LTV/CAC (unit economics) calculation. Investors' focus on unit economics creates incentives for management to inflate/overstate gross margins.
4/n This is a typical structure of Cost of revenue for SaaS company based on analysis of 50+ companies: 
5/n Yet some companies get creative (intentionally or not) and allocate costs, which are typically allocated to CoS, to other expense lines, like Sales and marketing, Research and development or even General and administrative.
6/n These are alternative ways of allocating costs which are typically get into Cost of revenue
7/n Cases of $WORK $BOX $DDOG and $NET require additional explanation
8/n All these 4 companies allocate part of infrastructure and customer support costs attributed to serving users of free versions/trial products to Sales and marketing (which actually makes some sense, but it's not a common industry practice based on my analysis)
9/n $WORK
10/n $BOX
11/n $NET
12/n While there are other ways to overstate/inflate Gross margin, I think taking out costs related to providing free version/trial product is the most distortive
13/n This is a small sample and may be not relevant at all, but I think this technique can inflate reported gross margin by 6-7%
