What numeric example is given for a negative gross margin?

Jason M. LemkinCEO, SaaStr · Co-Founder of SaaStr AI, SaaStr Fund, Adobe Sign

Discovering Negative Gross Margins: The Hidden Danger in Fast-Growing Businesses

16 Sept 2023 · 1 min

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0:44

A short conversational excerpt from a Jason M. Lemkin YouTube video discussing the danger of discovering negative gross margins in fast-growing or late-stage startups. Key points: a business can be selling revenue at a loss (example: selling a dollar for $0.90), forcing painful repricing that can break product-market fit; founders should instrument gross margin metrics early. An investor anecdote warns that reported blended high margins (e.g., "70%") can be misleading and that below-80% gross-margin businesses may have worse-than-expected unit economics.

Questions this video answers

"Selling a dollar for 90 cents" (i.e., $1 sold for $0.90).

Chapters

Then you find out, well, wait a second, this business is actually negative gross margin. Yeah. One of the worst things you can ever discover is that your late stage business, which is growing really fast, is actually negative gross margin. Because what that means is you've been selling dollars for 90 cents and so now you have to question if you, you have to reprice everything, meaning you have to, you now have to change your pricing of the product to get out of negative gross margins. And when you do that, you might lose your product market fit. So it's like you really got to make sure from the beginning that you're properly instrumented on things like gross margin. Yeah. You had an insight when we caught.
Up the other day, just for folks here that I thought was simple but pretty profound. If you're not an 80% gross margin business, if you have.
Other stuff, your.
Margins are probably much worse than you think.
Yeah. I just went through this with the startup. I invested in every, I mean, best team, best everything, but they have a blended business and I was like, your margins can't really be 70.