What is Gross margin?
Gross margin is revenue minus cost of goods sold, expressed as a percentage of revenue, showing how much of each sale is left to cover overhead.
Gross margin measures how much money a sale leaves after paying for the product itself. Gross profit is revenue minus cost of goods sold; gross margin is that profit divided by revenue. A store that sells a $50 item it bought for $30 earns $20 gross profit, a 40% gross margin. That 40 cents of every dollar is what pays rent, wages, marketing and, eventually, the owner.
Margin is easily confused with markup. Markup is profit divided by cost, so the same $30 item sold at $50 has a 66.7% markup but a 40% margin. Pricing with a markup target while reading margin reports leads to surprises. To hit a target margin, divide cost by one minus the margin: a $30 item at a 40% target margin should sell for $30 ÷ 0.60 = $50.
Gross margin is most useful by item, category and channel. A product that sells well on Amazon may carry a much thinner margin than the same product in-store once referral fees, fulfilment fees and advertising are counted. Tracking landed cost, returns and discounts at the line level gives a real margin rather than an optimistic one, and makes it clear which products are funding the business.
A hardware store sells $200,000 in a quarter with $128,000 COGS. Gross profit = $72,000; gross margin = $72,000 ÷ $200,000 = 36%. If a supplier price increase raises COGS to $134,000 without a price change, margin falls to 33%, a $6,000 drop in gross profit.
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