Gross margin
In short. Gross margin is the share of revenue left after the direct costs of making or delivering a product or service. It is calculated as revenue minus cost of goods sold, divided by revenue, and shown as a percentage. It shows how much is left to cover overheads and profit.
Last checked against its sources on 10 October 2026. How we write these.
If you sell an item for 100 and the direct cost of producing it is 60, the gross profit is 40 and the gross margin is 40 per cent. The remaining 40 must cover rent, wages not tied to delivery, marketing and everything else, with profit as what is left.
What counts as a direct cost depends on the business. For a manufacturer it is materials and production labour. For a consultancy it may be the time of the people who deliver the work. Being consistent in what you include is more important than the exact rule, because it allows comparison from month to month.
Gross margin guides pricing and growth decisions. A business with a thin margin needs high volume or tight cost control, and a small price rise can make a large difference. A café that discounts a coffee by 20 pence may find the margin on that line is nearly gone.
It is easy to confuse gross margin with markup. Markup is profit as a percentage of cost, while margin is profit as a percentage of price. A product with a 50 per cent markup has a margin of about 33 per cent.
Questions people ask
What is a good gross margin?
It varies widely by industry. Software and professional services often have higher margins than retail or food, so compare against similar businesses rather than a single target.
Is gross margin the same as net profit?
No. Gross margin only deducts direct costs. Net profit also deducts overheads, interest and tax.
Sources
- Gross Margin Ratio – Corporate Finance Institute checked 10 October 2026