What Is a Gross Margin? What Is the Meaning of Gross Margin?
What is a gross margin? Gross margin (or gross profit margin) is the percentage of revenue that remains after subtracting the cost of goods sold (COGS). It measures profit from core product or service sales before operating expenses, interest, and taxes.
What is the meaning of gross margin? Gross margin shows how much of each dollar of sales the company keeps after direct production or delivery costs. A 50% gross margin means half of revenue is gross profit—available to cover operating expenses and contribute to net income. Gross margin reflects pricing power (can you charge more?) and cost efficiency (can you produce for less?). Higher gross margins generally indicate a stronger business model.
Gross Margin Formula
The gross margin formula is:
Gross Margin (%) = (Revenue − COGS) ÷ Revenue × 100
Or: Gross Margin = (Gross Profit ÷ Revenue) × 100. COGS = cost of goods sold (direct costs of producing or delivering the product).
Example: Revenue $500,000, COGS $300,000 → Gross profit $200,000 → Gross margin = ($200,000 ÷ $500,000) × 100 = 40%.
How to Calculate Gross Margin
How to calculate gross margin? Get revenue and COGS from the income statement. Subtract COGS from revenue to get gross profit. Divide gross profit by revenue and multiply by 100 to get the percentage.
Where to find the numbers
Revenue (or sales) is the top line of the income statement. COGS (cost of goods sold, or cost of revenue) is listed below revenue. Gross profit = Revenue − COGS. Many companies report gross margin as a percentage in earnings releases. Use the same period for both figures (e.g., quarterly or annual).
How to Find Gross Margin
How to find gross margin: Open the income statement. Locate revenue and COGS. If gross profit is shown, divide it by revenue and multiply by 100. If not, calculate gross profit first (revenue − COGS), then apply the formula. Financial websites often display gross margin for public companies. Verify the calculation if you are unsure of the definition used.
Is a Gross Margin of 70% Good?
Is a gross margin of 70% good? Yes—a 70% gross margin is typically excellent. It means the company keeps 70 cents of every dollar of revenue after direct production costs.
Gross margin norms vary by industry. Software and SaaS companies often have 70–80%+ gross margins because COGS is low. Retailers and manufacturers may have 20–40% gross margins. A 70% gross margin for a retailer would be exceptional; for a software company, it might be average. Compare to sector peers. A 70% gross margin generally suggests strong pricing power, differentiated products, or low variable costs—all positive signs for investors.
Gross Margin vs. Operating and Net Margin
Gross margin is profit after COGS. Operating margin subtracts operating expenses (SG&A, R&D, etc.)—it includes more costs. Net margin is the bottom line after all expenses, interest, and taxes. A company can have a high gross margin but low operating or net margin if operating expenses are high. See our operating margin and net income guides for the full profitability picture.
Why Gross Margin Matters
Gross margin indicates the core economics of the business. A company with a low or declining gross margin may face pricing pressure or rising input costs. A stable or improving gross margin suggests pricing power and cost control. Gross margin also affects how much room there is for operating leverage—high gross margin leaves more to cover fixed costs and drive profit growth as revenue scales.
Gross Margin Example
Company A: Revenue $1B, COGS $600M → Gross profit $400M, gross margin 40%. Company B: Revenue $500M, COGS $150M → Gross profit $350M, gross margin 70%. Company B has a much higher gross margin— it retains more from each sale. Company B may have a software or high-margin model; Company A may be in retail or manufacturing. Compare both to their respective industry averages.
Frequently Asked Questions
What is a gross margin?
Gross margin is the percentage of revenue left after subtracting the cost of goods sold (COGS). It measures how much profit a company makes from its core product or service sales before operating expenses. Gross margin = (Revenue − COGS) ÷ Revenue × 100. A 40% gross margin means 40 cents of every dollar of revenue remains after direct production costs.
What is the meaning of gross margin?
The meaning of gross margin: it shows the percentage of sales revenue that exceeds the direct cost of producing or delivering the product. It reflects pricing power and cost efficiency. A higher gross margin means the company retains more from each sale to cover operating expenses, interest, and profit. It is a key indicator of business model strength and competitive advantage.
How do you calculate gross margin?
Gross margin = (Revenue − COGS) ÷ Revenue × 100. Get revenue and COGS from the income statement. Example: Revenue $1M, COGS $600K → Gross profit $400K → Gross margin = 400 ÷ 1,000 × 100 = 40%. Or: Gross margin = (Gross Profit ÷ Revenue) × 100. Many companies report gross margin directly in their financial statements.
How do you find gross margin?
To find gross margin, look at the income statement. Calculate (Revenue − COGS) ÷ Revenue × 100. Or find gross profit (revenue minus COGS) and divide by revenue. Some companies report gross margin as a percentage in earnings releases or investor presentations. Use annual or quarterly figures depending on your analysis.
Is a gross margin of 70% good?
A gross margin of 70% is generally excellent. It means the company keeps 70 cents of every dollar of revenue after direct production costs. Software and high-margin businesses often achieve 70%+ gross margins. For retailers or manufacturers, 70% would be exceptional. Compare to industry peers—what is "good" varies by sector. A 70% gross margin suggests strong pricing power or low variable costs.