Finance & Accounting
Definition
Gross margin is revenue minus cost of goods sold (COGS), expressed as a percentage of revenue. It measures how much of each dollar of revenue is retained after direct production or delivery costs — before operating expenses like sales, marketing, and R&D. High gross margins signal pricing power and scalable economics.
Gross margin = (Revenue − COGS) ÷ Revenue × 100. COGS includes direct costs: raw materials, manufacturing labor, cloud hosting costs for SaaS, cost of professional services delivered. It excludes indirect costs like salaries for sales/marketing teams, R&D, and G&A. Gross margin benchmarks vary significantly by industry: SaaS companies typically achieve 70–85%; professional services 30–50%; retail 25–50%; manufacturing 20–40%. Gross margin is a critical input to unit economics — you cannot build a profitable business if your gross margin is below your customer acquisition cost payback period. Investors scrutinize gross margin trends: a declining gross margin in a growing company often signals pricing pressure, cost inflation, or a shift to lower-margin products.
Gross margin is the foundation of business economics — it determines whether a company can ever be profitable at scale. Understanding your gross margin by product, customer segment, and channel is essential for pricing decisions, product mix strategy, and investor conversations. A financial advisor or business consultant can build gross margin models and identify where margin is leaking.