What is gross margin and why is it important?

It is the percent of revenue left after paying the direct costs of what you sold, computed as (revenue − COGS) ÷ revenue × 100. It matters because it shows pricing power and production efficiency in a single number, and because every other expense has to fit inside it.

How does gross margin differ from net margin?

Gross margin subtracts only COGS; net margin subtracts everything — operating expenses, interest, and taxes — and lands on actual profit. A company can have a healthy gross margin and a negative net margin if the lines below COGS are heavy.

What is a good gross margin percentage?

It depends entirely on the industry: groceries run near 25%, general retail around 35–45%, manufacturing 25–35%, and software commonly 70–85% because the marginal cost of another user is tiny. Benchmark against your own sector, not a universal number.

How can I improve my gross margin?

Raise prices, cut direct input or freight costs, or shift mix toward higher-margin items — in roughly that order of leverage. Even small price increases flow almost entirely to gross profit, while discounting does the reverse, which is why margin math belongs next to every promotion decision.

What costs are included in Cost of Goods Sold?

Costs that vary directly with production and sales: raw materials, direct labor to make or deliver the product, inbound freight, and factory utilities. Sustained rent, admin salaries, marketing, and insurance are operating expenses and stay out of COGS.

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What gross margin measures

Gross margin is the share of every sales dollar left after paying the direct cost of the product itself: (revenue − COGS) ÷ revenue × 100. It is the first line of defense in an income statement — the money that must still cover payroll, rent, marketing, and everything else before anything becomes profit.

What belongs in COGS

Only costs that move with each unit sold: materials, direct production labor, factory freight, and payment processing on the sale. Sales and marketing salaries, administration, and software subscriptions are operating expenses, not COGS — parking them in COGS makes margin look worse and muddies comparisons with competitors who classify correctly.

Margin against markup

Markup prices a product as a percentage of its cost; margin reads profit as a percentage of its price. A $40 item marked up 100% sells for $80 and carries a 50% margin. Retailers tend to think in markup, accountants and analysts in margin — the board above shows both so the conversion never has to be guessed.

Worked example

A quarter closes with $100,000 of revenue and $60,000 of COGS.
Gross profit = 100,000 − 60,000 = $40,000.
Gross margin = 40,000 ÷ 100,000 × 100 = 40.0%.
Markup on cost = 40,000 ÷ 60,000 × 100 = 66.7% — same dollars, different divisor.

How to use it

Pick your reporting currency.
Enter revenue for the period and the COGS that directly produced it.
Read gross profit, margin, and markup — each labeled with its formula.
Use the margin note to convert between margin and markup before pricing.