Glossary · Finance
What is Gross Margin?
Definition
Gross margin is the percentage of revenue left after subtracting the direct cost of producing or delivering what you sold.
Gross margin % = (revenue − COGS) ÷ revenue × 100
Why it matters
Gross margin tells you how much each sale contributes toward paying overhead and leaving profit. A low gross margin means you have little room for mistakes, discounts, or advertising.
Suppose a candle shop sells a candle for $24 and the wax, wick, jar, and label cost $8. Gross profit is $16, so gross margin is 16 divided by 24, or about 67 percent. If that shop sells 300 candles a month, gross profit is $4,800 before rent, software, and marketing.
Compare your margin with others in your industry. Many service businesses run 60 to 80 percent, while resellers of physical goods often run 20 to 50 percent.
Common mistakes
- !Leaving out packaging, payment processing fees, or shipping supplies when calculating direct costs.
- !Confusing gross margin with markup, which uses cost instead of revenue as the base.
Frequently asked questions
What is Gross Margin?
Gross margin is the percentage of revenue left after subtracting the direct cost of producing or delivering what you sold.
How do you calculate Gross Margin?
Gross margin % = (revenue − COGS) ÷ revenue × 100
What mistakes do beginners make with Gross Margin?
Leaving out packaging, payment processing fees, or shipping supplies when calculating direct costs. Confusing gross margin with markup, which uses cost instead of revenue as the base.
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