Gross Margin %
Efficiency
Financials
Industry:
Sector Agnostic
Aliases:
Short Definition
Gross Margin (%) shows how much of each dollar of revenue remains after paying for the direct costs to produce and deliver your product or service. It indicates how efficiently a company runs its core operations and how much cash is left to cover other expenses such as marketing, research and development, and administration.
Short Definition
Gross Margin (%) shows how much of each dollar of revenue remains after paying for the direct costs to produce and deliver your product or service. It indicates how efficiently a company runs its core operations and how much cash is left to cover other expenses such as marketing, research and development, and administration.
Short Definition
Gross Margin (%) shows how much of each dollar of revenue remains after paying for the direct costs to produce and deliver your product or service. It indicates how efficiently a company runs its core operations and how much cash is left to cover other expenses such as marketing, research and development, and administration.
Why it matters for Investors
Health check on core business: A higher gross margin means the company earns more from each sale after covering delivery costs.
Efficiency driver: Improving gross margin creates room for reinvestment and brings the company closer to profitability.
Comparability tool: It allows fair comparison of business performance over time or across different industries and pricing models.
Why it matters for Investors
Health check on core business: A higher gross margin means the company earns more from each sale after covering delivery costs.
Efficiency driver: Improving gross margin creates room for reinvestment and brings the company closer to profitability.
Comparability tool: It allows fair comparison of business performance over time or across different industries and pricing models.
Why it matters for Investors
Health check on core business: A higher gross margin means the company earns more from each sale after covering delivery costs.
Efficiency driver: Improving gross margin creates room for reinvestment and brings the company closer to profitability.
Comparability tool: It allows fair comparison of business performance over time or across different industries and pricing models.
Formula
Practical considerations:
Define direct costs clearly: Include only expenses directly tied to producing and delivering your product or service (e.g., materials, shipping, hosting, payment fees). Avoid mixing in overhead or administrative costs to keep calculations accurate and consistent.
Maintain consistency: Apply the same criteria for cost inclusion across all reporting periods to reliably track changes in gross margin.
Align revenue and cost recognition: Ensure revenue and Cost of Goods Sold (COGS) use the same accounting method (e.g., GAAP or non-GAAP) to prevent misleading margin percentages caused by timing differences.
Segment margins where relevant: For businesses with multiple products, customer groups, or channels, track gross margin separately to catch unprofitable areas hidden by aggregated data.
Monitor cost drivers regularly: Keep an eye on supplier prices, shipping fees, cloud or API costs, and logistics expenses, which can erode margin over time if not managed.
Separate one-time or unusual expenses: Exclude or flag costs such as refunds, warranty claims, or system upgrades to keep gross margin focused on ongoing business performance.
Use both gross profit dollars and percentages: Reporting both gives a fuller picture of scale and efficiency.
Manage pass-through revenue and costs correctly: Include matching direct costs if your revenue includes fees passed on to customers to avoid margin inflation.
Formula
Practical considerations:
Define direct costs clearly: Include only expenses directly tied to producing and delivering your product or service (e.g., materials, shipping, hosting, payment fees). Avoid mixing in overhead or administrative costs to keep calculations accurate and consistent.
Maintain consistency: Apply the same criteria for cost inclusion across all reporting periods to reliably track changes in gross margin.
Align revenue and cost recognition: Ensure revenue and Cost of Goods Sold (COGS) use the same accounting method (e.g., GAAP or non-GAAP) to prevent misleading margin percentages caused by timing differences.
Segment margins where relevant: For businesses with multiple products, customer groups, or channels, track gross margin separately to catch unprofitable areas hidden by aggregated data.
Monitor cost drivers regularly: Keep an eye on supplier prices, shipping fees, cloud or API costs, and logistics expenses, which can erode margin over time if not managed.
Separate one-time or unusual expenses: Exclude or flag costs such as refunds, warranty claims, or system upgrades to keep gross margin focused on ongoing business performance.
Use both gross profit dollars and percentages: Reporting both gives a fuller picture of scale and efficiency.
Manage pass-through revenue and costs correctly: Include matching direct costs if your revenue includes fees passed on to customers to avoid margin inflation.
Formula
Practical considerations:
Define direct costs clearly: Include only expenses directly tied to producing and delivering your product or service (e.g., materials, shipping, hosting, payment fees). Avoid mixing in overhead or administrative costs to keep calculations accurate and consistent.
Maintain consistency: Apply the same criteria for cost inclusion across all reporting periods to reliably track changes in gross margin.
Align revenue and cost recognition: Ensure revenue and Cost of Goods Sold (COGS) use the same accounting method (e.g., GAAP or non-GAAP) to prevent misleading margin percentages caused by timing differences.
Segment margins where relevant: For businesses with multiple products, customer groups, or channels, track gross margin separately to catch unprofitable areas hidden by aggregated data.
Monitor cost drivers regularly: Keep an eye on supplier prices, shipping fees, cloud or API costs, and logistics expenses, which can erode margin over time if not managed.
Separate one-time or unusual expenses: Exclude or flag costs such as refunds, warranty claims, or system upgrades to keep gross margin focused on ongoing business performance.
Use both gross profit dollars and percentages: Reporting both gives a fuller picture of scale and efficiency.
Manage pass-through revenue and costs correctly: Include matching direct costs if your revenue includes fees passed on to customers to avoid margin inflation.
Worked Example
Line item | Amount | Notes |
|---|---|---|
Revenue | $50,000,000 | Per policy (GAAP or non-GAAP; match with COGS) |
Inventory/ Bill of Materials + Inbound Freight | $18,500,000 | Product cost |
Warehousing/ Packaging/ Returns | $3,000,000 | Fulfilment & reverse logistics |
Third-party APIs/ Processing | $1,000,000 | Payments/data/API tied to delivery |
Total COGS | $22,500,000 | |
Gross Profit | $27,500,000 | Revenue - COGS |
Gross Margin (%) | 55% | (27.5 ÷ 50.0) × 100 |
Notes:
Pass-throughs: If you gross up revenue for pass-through items, include matching costs in COGS (or report net).
Multi-product: Track margin by SKU/plan/channel; blended margins can hide leakage.
Worked Example
Line item | Amount | Notes |
|---|---|---|
Revenue | $50,000,000 | Per policy (GAAP or non-GAAP; match with COGS) |
Inventory/ Bill of Materials + Inbound Freight | $18,500,000 | Product cost |
Warehousing/ Packaging/ Returns | $3,000,000 | Fulfilment & reverse logistics |
Third-party APIs/ Processing | $1,000,000 | Payments/data/API tied to delivery |
Total COGS | $22,500,000 | |
Gross Profit | $27,500,000 | Revenue - COGS |
Gross Margin (%) | 55% | (27.5 ÷ 50.0) × 100 |
Notes:
Pass-throughs: If you gross up revenue for pass-through items, include matching costs in COGS (or report net).
Multi-product: Track margin by SKU/plan/channel; blended margins can hide leakage.
Worked Example
Line item | Amount | Notes |
|---|---|---|
Revenue | $50,000,000 | Per policy (GAAP or non-GAAP; match with COGS) |
Inventory/ Bill of Materials + Inbound Freight | $18,500,000 | Product cost |
Warehousing/ Packaging/ Returns | $3,000,000 | Fulfilment & reverse logistics |
Third-party APIs/ Processing | $1,000,000 | Payments/data/API tied to delivery |
Total COGS | $22,500,000 | |
Gross Profit | $27,500,000 | Revenue - COGS |
Gross Margin (%) | 55% | (27.5 ÷ 50.0) × 100 |
Notes:
Pass-throughs: If you gross up revenue for pass-through items, include matching costs in COGS (or report net).
Multi-product: Track margin by SKU/plan/channel; blended margins can hide leakage.
Best Practices
Define and publish clear rules for what counts as revenue and COGS.
Regularly update unit and input costs (inventory, cloud, logistics) to keep margin calculations accurate.
Track margins by product, segment, channel, or region to target improvements.
Use transparent methods and reconcile with formal financial statements.
Monitor discounting and enforce pricing floors to protect margins.
Best Practices
Define and publish clear rules for what counts as revenue and COGS.
Regularly update unit and input costs (inventory, cloud, logistics) to keep margin calculations accurate.
Track margins by product, segment, channel, or region to target improvements.
Use transparent methods and reconcile with formal financial statements.
Monitor discounting and enforce pricing floors to protect margins.
Best Practices
Define and publish clear rules for what counts as revenue and COGS.
Regularly update unit and input costs (inventory, cloud, logistics) to keep margin calculations accurate.
Track margins by product, segment, channel, or region to target improvements.
Use transparent methods and reconcile with formal financial statements.
Monitor discounting and enforce pricing floors to protect margins.
FAQs
What goes in COGS for Gross Margin?
Only costs required to deliver the product/service (e.g., BOM/materials, hosting, processing, inbound freight, packaging, returns/warranty).Shipping and payment fees — COGS or OpEx?
If they’re necessary to fulfill/deliver, put them in COGS for comparability.Gross Margin vs Contribution Margin?
Gross Margin subtracts COGS only. Contribution Margin subtracts all variable costs (may include some OpEx).Gross Margin vs EBIT Margin?
EBIT Margin also deducts OpEx (S&M, R&D, G&A). Gross Margin doesn’t.Does scale always improve margin?
Often, but mix shifts and discounting can offset scale; use a driver bridge to see why margin moved.Why does Gross Margin matter for CAC Payback/Rule of 40?
Higher gross margin → higher gross profit/customer → faster CAC payback and better EBITDA/FCF, improving Rule of 40.Can gross margin be negative?
Yes—deep discounting, high returns, or variable costs exceeding price can drive negative margin.Do pass-through items inflate margin?
They can if revenue is grossed up without matching costs. Prefer net reporting or include the matching COGS.
FAQs
What goes in COGS for Gross Margin?
Only costs required to deliver the product/service (e.g., BOM/materials, hosting, processing, inbound freight, packaging, returns/warranty).Shipping and payment fees — COGS or OpEx?
If they’re necessary to fulfill/deliver, put them in COGS for comparability.Gross Margin vs Contribution Margin?
Gross Margin subtracts COGS only. Contribution Margin subtracts all variable costs (may include some OpEx).Gross Margin vs EBIT Margin?
EBIT Margin also deducts OpEx (S&M, R&D, G&A). Gross Margin doesn’t.Does scale always improve margin?
Often, but mix shifts and discounting can offset scale; use a driver bridge to see why margin moved.Why does Gross Margin matter for CAC Payback/Rule of 40?
Higher gross margin → higher gross profit/customer → faster CAC payback and better EBITDA/FCF, improving Rule of 40.Can gross margin be negative?
Yes—deep discounting, high returns, or variable costs exceeding price can drive negative margin.Do pass-through items inflate margin?
They can if revenue is grossed up without matching costs. Prefer net reporting or include the matching COGS.
FAQs
What goes in COGS for Gross Margin?
Only costs required to deliver the product/service (e.g., BOM/materials, hosting, processing, inbound freight, packaging, returns/warranty).Shipping and payment fees — COGS or OpEx?
If they’re necessary to fulfill/deliver, put them in COGS for comparability.Gross Margin vs Contribution Margin?
Gross Margin subtracts COGS only. Contribution Margin subtracts all variable costs (may include some OpEx).Gross Margin vs EBIT Margin?
EBIT Margin also deducts OpEx (S&M, R&D, G&A). Gross Margin doesn’t.Does scale always improve margin?
Often, but mix shifts and discounting can offset scale; use a driver bridge to see why margin moved.Why does Gross Margin matter for CAC Payback/Rule of 40?
Higher gross margin → higher gross profit/customer → faster CAC payback and better EBITDA/FCF, improving Rule of 40.Can gross margin be negative?
Yes—deep discounting, high returns, or variable costs exceeding price can drive negative margin.Do pass-through items inflate margin?
They can if revenue is grossed up without matching costs. Prefer net reporting or include the matching COGS.
Related Metrics
Commonly mistaken for:
Contribution Margin (revenue minus variable costs, divided by revenue; excludes fixed production/ fulfillment costs that are included in COGS/Cost of Sales for Gross Margin)
EBITDA Margin (EBITDA ÷ revenue; includes operating expenses such as Research and Development Expense, Sales and Marketing Expense, and General and Administrative Expense —well below Gross Margin, which excludes operating expenses)
Net Income Margin (net income ÷ revenue; includes interest, taxes, and all non-operating items —much farther below Gross Margin)
Related Metrics
Commonly mistaken for:
Contribution Margin (revenue minus variable costs, divided by revenue; excludes fixed production/ fulfillment costs that are included in COGS/Cost of Sales for Gross Margin)
EBITDA Margin (EBITDA ÷ revenue; includes operating expenses such as Research and Development Expense, Sales and Marketing Expense, and General and Administrative Expense —well below Gross Margin, which excludes operating expenses)
Net Income Margin (net income ÷ revenue; includes interest, taxes, and all non-operating items —much farther below Gross Margin)
Related Metrics
Commonly mistaken for:
Contribution Margin (revenue minus variable costs, divided by revenue; excludes fixed production/ fulfillment costs that are included in COGS/Cost of Sales for Gross Margin)
EBITDA Margin (EBITDA ÷ revenue; includes operating expenses such as Research and Development Expense, Sales and Marketing Expense, and General and Administrative Expense —well below Gross Margin, which excludes operating expenses)
Net Income Margin (net income ÷ revenue; includes interest, taxes, and all non-operating items —much farther below Gross Margin)
Source of:
Components:
Index