Gross margin is the percentage of revenue left after subtracting the cost of goods sold (COGS) — the direct costs of producing what a company sells. The formula is: (Revenue − COGS) ÷ Revenue × 100.
A company with $1 million in revenue and $400,000 in COGS has a gross margin of 60%. That 60% covers everything else: operating expenses, marketing, R&D, taxes, and profit.
You’ll hear this when…
Gross margin is a standard metric in financial analysis, investor conversations, and pricing discussions. Different industries have dramatically different typical gross margins: software companies often run above 70%, while grocery retailers might operate at 25–30%.
“Improving gross margin” usually means either increasing prices, reducing production costs, or shifting the product mix toward higher-margin offerings.
When someone distinguishes between “gross margin” and “net margin,” they’re separating the production-level picture (gross) from the bottom-line picture (net, which also subtracts operating expenses, interest, and taxes).
Gross margin vs. markup
These are related but different. A 60% gross margin means 60% of the selling price is gross profit. A 60% markup means the selling price is 60% higher than the cost. A product that costs $40 and sells for $100 has a 60% gross margin but a 150% markup. Confusing the two is a common pricing mistake.
For a deeper look at how “margin” means different things in different fields, see “Margin” means five different things depending on who’s talking.
Source: Generally accepted accounting principles (GAAP) income statement classification