What Is Gross Margin?

Gross margin is the percentage of revenue a business keeps after subtracting the direct cost of producing or acquiring what it sold — its cost of goods sold (COGS). It shows how much of every sales dollar is left over to cover overhead, marketing, and profit, before any other expenses are counted.

Gross margin is one of the first numbers investors and business owners check because it reveals the core economics of a product or business model before operating costs muddy the picture. A high gross margin means there's a lot of room to spend on growth, salaries, and rent while still turning a profit. A thin gross margin means the business has very little cushion if costs rise or sales dip.

The Formula

Gross Margin % = ((Revenue − COGS) ÷ Revenue) × 100

Worked Example

Say a company sells $500,000 worth of product in a quarter, and the cost of goods sold — materials, direct labor, manufacturing — totals $300,000. Gross Profit = 500,000 − 300,000 = $200,000. Gross Margin = (200,000 ÷ 500,000) × 100 = 40%. For every dollar of revenue, the company keeps 40 cents before paying rent, salaries, marketing, and taxes.

ItemAmount
Revenue$500,000
Cost of Goods Sold (COGS)$300,000
Gross Profit$200,000
Gross Margin40%

Gross Margin Varies Enormously by Industry

A software company might report 80% gross margin because delivering another copy of its product costs almost nothing beyond servers and support. A grocery store might report 22% gross margin because it's reselling low-margin physical goods with thin markups. Comparing gross margin across industries is usually meaningless — comparing it against competitors in the same industry, or against a company's own history, is far more useful.

Figures above are illustrative estimates only, not financial or investment advice. Actual reported gross margin can vary based on accounting method and what a company classifies as COGS.

Frequently Asked Questions

What is gross margin in simple terms?

Gross margin is the percentage of each sales dollar a company keeps after paying the direct cost of producing or acquiring what it sold, before operating expenses like rent, salaries, and marketing.

What is the gross margin formula?

Gross Margin % = ((Revenue - Cost of Goods Sold) / Revenue) x 100. It is also sometimes called gross profit margin.

Is gross margin the same as net margin?

No. Gross margin only subtracts cost of goods sold from revenue. Net margin subtracts all expenses, including operating costs, interest, and taxes, giving a narrower profitability picture.

What is a good gross margin?

It varies hugely by industry. Software companies often see 70-90% gross margins, grocery stores commonly run 20-25%, and restaurants often see 60-70% on food alone before labor and rent.

How is gross margin different from markup?

Gross margin is profit as a percentage of selling price (revenue), while markup is profit as a percentage of cost. The same dollar profit produces a lower margin percentage than markup percentage.

Why do investors care about gross margin?

Gross margin shows how much room a company has to cover operating costs and still turn a profit. Rising gross margin over time often signals pricing power or improving efficiency.

Related