Gross Margin shows how much revenue remains after accounting for the direct costs of producing goods or delivering services. It highlights the efficiency of a company’s core business model by indicating how much money is left to cover operating expenses, marketing, and profit after deducting production costs.
Instead of simply memorizing a formula, think of it as a short process:
Note the total income from sales during the chosen time frame.
Add up the costs directly linked to creating or providing the product or service.
Subtract those expenses from revenue to see the gross profit.
Divide gross profit by revenue to see what fraction of revenue remains.
Multiply by 100 to make the result easier to compare across periods or industries.
Gross Margin = (Revenue – COGS) / Revenue
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It provides insight into a company’s profitability and cost efficiency. A higher margin means more flexibility to invest in growth or absorb operational costs.
Gross Margin only considers direct production costs, while Net Margin includes all expenses, such as overhead, marketing, and taxes.
Pricing strategy, supplier costs, efficiency in production, and sales mix directly influence margin levels.
Not necessarily. While higher margins are favorable, industries with naturally low margins (like retail) can still succeed with strong sales volume and efficient operations.