Gross Margin

Date created: Feb 16, 2019  •   Last updated: Nov 16, 2020

What is Gross Margin?

Gross Margin is a profitability ratio that measures Gross Profit as a percentage of total revenue. Typically, it is calculated as Gross Profit divided by revenue.

Alternate names: Gross Profit Margin, Markup

Formula

ƒ Sum(Gross Profit) / Sum(Revenue)

How to calculate

If a florist has a revenue of $15,000 and Cost of Goods Sold is $6,000, their Gross Margin will be: ($15,000 - $6,000) / $15,000 = 60%

Gross Margin

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What is a good Gross Margin benchmark?

Gross Margin Percentage by ARR

Gross Margin Percentage by ARR

OpenView, Sep 2019
Gross Margin Percentage by Target Customer

Gross Margin Percentage by Target Customer

OpenView, Sep 2019
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More about this metric

Gross Margin is the percentage of profit made by a company after the costs incurred in making a product are subtracted from the sales revenue. Gross Margin is typically expressed as a percentage, by dividing Gross Profit by Revenue.

Gross Margin is typically included in a company’s income statement. Executives use it as an indication of how efficiently a company is using its resources. If labor and supply costs are high, then Gross Margin will be low. Usually, Gross Margin does not include fixed costs or costs that the company will incur regardless of output.

Although Gross Profit may increase over time, Gross Margin percentage may not. You need to look at both the absolute value (in dollars) and percentage value (by dividing Gross Margin by Revenue) for a true understanding of your metric. Since Gross Margin does not consider fixed costs, it does not provide a complete picture of profitability, which is why it must be tracked alongside other profitability metrics.