Gross Margin
Percentage of revenue left after cost of goods.
Formula
Variables
Example
Higher = more profit per sale
How it works
Gross margin shows how much of each dollar of sales is left after paying for the goods you bought or made to sell. It works by subtracting cost of goods sold from revenue to find the gross profit, then dividing by revenue to express that profit as a percentage of sales. A higher gross margin usually means the business keeps more from each sale before other expenses like rent, wages, and marketing are paid.
When to use it
Use this formula when you want to judge how efficiently a business turns sales into gross profit, especially for retail, manufacturing, or product-based companies. It is useful for comparing products, pricing strategies, or performance across different periods.
Worked example, step by step
Revenue = $80,000 COGS = $50,000 Gross profit = Revenue - COGS = $80,000 - $50,000 = $30,000 Gross margin = (Gross profit / Revenue) × 100 Gross margin = ($30,000 / $80,000) × 100 Gross margin = 0.375 × 100 = 37.5% Final answer: Gross margin = 37.5%
Common mistakes to avoid
- Using net profit instead of revenue minus COGS
- Including operating expenses like wages, rent, or tax in COGS
- Forgetting to multiply by 100 when converting the ratio into a percentage
Did You Know?
Gross margin reveals how much of each sale survives after covering the direct cost of goods.
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