Gross Margin

What Is Gross Margin?

Gross margin expresses your gross profit as a percentage of revenue. While gross profit is a dollar amount, gross margin is a ratio that makes it easy to compare profitability across time periods, products, and companies of different sizes.

For example, if your business generates $200,000 in revenue and has $80,000 in cost of goods sold, your gross profit is $120,000 and your gross margin is 60%. This means you keep 60 cents of every dollar to cover operating expenses and profit.

Why It Matters for Your Business

Gross margin is one of the first metrics investors and analysts examine because it reveals the fundamental economics of your business model.

• Pricing power: A high gross margin suggests you have strong pricing power, a differentiated product, or efficient production. A low margin may indicate intense competition or high input costs.
• Product comparison: Analyzing gross margin by product line shows which offerings are most profitable and deserve more investment or marketing focus.
• Trend analysis: A declining gross margin over time can indicate rising material costs, pricing pressure, or a shift toward lower-margin products that requires strategic attention.

Gross margins vary significantly by industry. Software companies often have margins above 80%, while grocery stores operate at 25% to 30%. Comparing your margin to industry peers gives you context for whether your business is performing well.