Gross Margin
Short answer
Gross margin is the percentage of revenue left after subtracting direct costs (COGS). It is the ceiling on every downstream margin — if a business can't profit at the unit level, no amount of scale will fix it.
Formula
Gross Margin (%) = (Revenue − COGS) / Revenue × 100
Take your revenue, subtract the direct cost of what you sold (COGS), divide by revenue, multiply by 100.
Why it matters
Gross margin is the ceiling on every other margin. If you can't make money on the unit, scaling won't fix it — you'll just lose money faster. Lenders and acquirers use it to gauge pricing power and operational efficiency.
Benchmarks
Worked example
- Revenue$1,000,000
- COGS$620,000
(1,000,000 − 620,000) / 1,000,000 × 100 = 38% gross margin
People also ask
Common questions about Gross Margin
What is gross margin?+
Gross margin is (Revenue − COGS) ÷ Revenue, expressed as a percentage. It measures how much money is left from each dollar of sales after the direct cost of producing the product or delivering the service.
How do I calculate gross margin?+
Gross margin (%) = (Revenue − COGS) ÷ Revenue × 100. Example: $1M revenue, $620k COGS = $380k gross profit = 38% gross margin.
What is a good gross margin?+
It depends on the industry. Software is conventionally high (70–85%); professional services mid-range (40–60%); retail and e-commerce lower (30–50%); distribution and construction lower still (15–25%). CFO Grade benchmarks your margin against your sector automatically.
What's the difference between gross margin and net margin?+
Gross margin only subtracts direct costs (COGS). Net margin subtracts everything — operating expenses, interest, taxes. A 40% gross margin business with high overhead might still net only 5%.
See your business's gross margin.
Paste your numbers and CFO Grade computes this — plus 23 other ratios — in seconds, with your industry's benchmark already loaded.