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Gross Margin

In short

Revenue minus cost of goods — how much profit before overhead

If you sell a sandwich for $10 and the ingredients cost $3, your gross margin is 70% — the product itself is highly profitable before rent, salaries, or marketing even enter the picture. A supermarket reselling the same sandwich for $10 after paying $8 to stock it has a gross margin of just 20%.

Gross margin is (revenue minus cost of goods sold) divided by revenue — the share left after direct production costs, before overhead like rent, salaries, marketing, or R&D. It reflects pricing power and production efficiency: a business charging well above its direct costs has room to invest, absorb cost inflation, or compete on price. Levels vary by business model — software companies routinely post 70-85%+ gross margins since delivering an extra unit costs almost nothing, while retailers and distributors often sit in the 20-35% range because COGS is most of the price. Comparisons across companies can be muddied by classification choices, since what counts as COGS versus operating expense isn't fully standardized, so it's most reliable tracked for one company over time.

Formula

Gross Margin = (Revenue - COGS) ÷ Revenue × 100

Thresholds

<20
Thin margins — commodity business
20-40
Average
40-60
Good — some pricing power
>60
Strong pricing power or asset-light

Related concepts

  • Operating Margin — After paying for the ingredients AND the rent, salaries, marketing, and everything else it takes to run the business day to day, what percentage of each sales dollar is left? A retailer selling $100 of goods and clearing $8 after all of that has an 8% operating margin — before interest and taxes are even considered.
  • Net Margin — Net margin is what's left after EVERY expense — cost of goods, rent, salaries, interest on debt, and taxes. If a company brings in $100 of revenue and keeps $12 after all of that, its net margin is 12%. It's the strictest profitability measure, sitting below gross and operating margin since it also absorbs financing costs and one-time items.
  • FCF Margin — If a business earns $100 in sales and has $15 left after paying all its bills and investing in the equipment needed to keep running, its FCF margin is 15%. Cash is what actually funds dividends, buybacks, and debt paydown — accounting profit alone doesn't.