Findocs
Business Finance

Gross Margin

The percentage of revenue remaining after deducting the cost of goods sold — a key measure of how efficiently a company produces or sources its products.

Gross Margin

Gross margin is the percentage of revenue that remains after subtracting the direct costs of producing or purchasing the goods sold (Cost of Goods Sold, or COGS). It measures how efficiently a company generates profit from its core operations before accounting for operating expenses.

The Formula

Gross Margin = (Revenue − COGS) / Revenue × 100

Or at the per-unit level:

Gross Margin = (Selling Price − Unit Cost) / Selling Price × 100

Example:

  • Product sells for $80
  • Product costs $32 to make or purchase
  • Gross Margin = ($80 − $32) / $80 × 100 = 60%

Gross Margin vs. Markup

These are frequently confused because they use the same profit dollar, but different denominators:

| | Formula | Example | |--|---------|---------| | Gross Margin | Profit / Selling Price | $48 / $80 = 60% | | Markup | Profit / Cost | $48 / $32 = 150% |

A 150% markup produces a 60% gross margin — same product, very different-looking percentages.

Industry Benchmarks

| Industry | Typical Gross Margin | |----------|---------------------| | SaaS / Software | 70–90% | | Pharmaceuticals | 60–80% | | Luxury goods | 55–75% | | Consumer electronics | 30–45% | | Retail (general) | 30–50% | | Restaurants (food cost) | 60–70% | | Grocery | 20–30% | | Auto dealers | 10–20% |

Gross Margin vs. Net Margin

Gross margin only deducts Cost of Goods Sold. Net margin deducts all expenses — COGS plus operating expenses (rent, salaries, marketing, R&D, interest, taxes).

A company can have a high gross margin and a low net margin if its operating costs are high. This is common in retail and restaurants, where labor and rent are major expenses.

Why Gross Margin Matters

Gross margin determines how much money is available to cover operating expenses and generate profit. A gross margin that is too thin relative to fixed costs means the business cannot be profitable at any level of sales — a structural problem that no amount of revenue growth can fix.

Related Tools

← Back to Glossary