What Is Gross Margin?
Gross margin is the percentage of revenue left after subtracting the cost of goods sold, calculated as (revenue − COGS) ÷ revenue. It measures how efficiently a company produces and prices its products before operating costs.
What gross margin is and why it matters
Gross margin shows how much of each sales dollar remains to cover operating expenses and profit after paying the direct costs of what was sold. It's a purer read on pricing and production efficiency than net margin, because it excludes overhead, marketing, and taxes. A rising gross margin means better pricing power or lower unit costs; a falling one signals cost pressure or discounting. Because it varies widely by industry — software runs high, grocery runs thin — gross margin is most useful compared within an industry and tracked over time.
A worked example
A company reports revenue of $500,000 and cost of goods sold of $300,000. Gross profit is $500,000 − $300,000 = $200,000. Gross margin = $200,000 ÷ $500,000 = 40%. That means 40 cents of every sales dollar is available to cover operating expenses and profit. If COGS rose to $350,000 next year on the same revenue, gross margin would fall to 30% — an early warning of margin erosion.
How firms handle it today
Firms calculate gross margin from the income statement once COGS is accurately captured, and track it across periods as a key profitability indicator in reporting and advisory conversations.
Related terms
FAQ
What's the gross margin formula?
(Revenue − cost of goods sold) ÷ revenue, expressed as a percentage.
What's the difference between gross margin and net margin?
Gross margin subtracts only COGS; net margin subtracts all expenses, including operating costs, interest, and taxes.
What is a good gross margin?
It depends heavily on industry — software can exceed 70%, while retail and grocery often run in the teens or single digits.