Definition (canonical)
Gross margin is the share of revenue left after subtracting the direct cost of producing what you sell (COGS), expressed as a percentage: gross margin = (revenue − COGS) / revenue. It measures how much each sales dollar contributes before operating expenses, and it is the single clearest signal of pricing power and how scalable a business really is.
What it reveals
Gross margin separates the cost of making the product from the cost of running the company. A high gross margin (software often 70–90%) means most of each new sale drops toward covering fixed costs and profit — the essence of a scalable model. A low gross margin (retail and hardware often 20–40%) means growth requires proportionally more cost of goods, so scale comes slower and working capital matters more. Rising gross margin over time signals pricing power or production efficiency; falling margin is an early warning of commoditization or input-cost pressure, long before it shows in net profit.
Gross margin vs markup vs net margin
Three numbers get confused. Margin is profit as a percentage of the selling price; markup is profit as a percentage of cost — a 50% markup is only a 33% margin, and pricing off the wrong one silently erodes profit. Gross margin deducts only direct costs; net margin deducts everything (opex, interest, tax). A company can show 80% gross and 5% net and be perfectly healthy — see gross vs net and the broader concept of margin for the full ladder.
Benchmarks and use
There is no universal "good" number — judge against your industry: software and digital 70–90%, agencies and services 40–60%, e-commerce and consumer goods 25–45%, grocery and distribution 10–25%. Track the trend, not just the level, and watch mix: adding a low-margin product line drags the blended figure even if each sale is profitable. In SaaS, "gross margin" should include hosting, support and payment fees — excluding them flatters the number and misleads investors.
FAQ
What is a good gross margin? It depends on the industry — 70%+ is normal for software, 20–40% for retail. The trend and comparison to peers matter more than any absolute figure.
Is gross margin the same as markup? No. Margin is profit over selling price; markup is profit over cost. The same profit gives a lower margin than markup.
What's excluded from gross margin? Operating expenses, interest and tax — those belong to operating and net margin, not gross.
Can gross margin be negative? Yes — if you sell below direct cost. It's a red flag that unit economics don't work.
Related: Margin · COGS · Gross vs Net Reviewed: 2026-08-02 · Sources: financial analysis canon