What is Gross Margin? Definition, Formula & Industry Benchmarks
Learn what gross margin means, how to calculate gross profit margin, and what constitutes a good gross margin by industry.
What is Gross Margin?
Gross margin (also called gross profit margin) measures the percentage of revenue remaining after subtracting the direct costs of producing goods or services. It shows how efficiently a company turns revenue into gross profit before operating expenses.
Gross Margin Formula
$$\text{Gross Margin} = \frac{\text{Revenue} - \text{Cost of Goods Sold}}{\text{Revenue}} \times 100%$$
Or equivalently:
$$\text{Gross Margin} = \frac{\text{Gross Profit}}{\text{Revenue}} \times 100%$$
Example Calculation
If a company has:
- Revenue: $100 million
- Cost of Goods Sold: $40 million
Gross Profit = $100M - $40M = $60M Gross Margin = ($60M ÷ $100M) × 100% = 60%
What’s Included in Cost of Goods Sold (COGS)?
| Industry | Typical COGS Items |
|---|---|
| Manufacturing | Raw materials, factory labor, equipment depreciation |
| Retail | Wholesale purchase cost, shipping to stores |
| Software | Hosting costs, customer support, licensing fees |
| Services | Labor costs to deliver service |
Gross Margin by Industry
Different industries have vastly different typical gross margins:
| Industry | Typical Gross Margin |
|---|---|
| Software/SaaS | 70-85% |
| Pharmaceuticals | 70-80% |
| Digital Advertising | 60-80% |
| Consumer Products | 40-60% |
| Retail | 25-50% |
| Restaurants | 60-70% |
| Airlines | 20-40% |
| Grocery | 25-35% |
| Automobiles | 10-20% |
What’s a Good Gross Margin?
A “good” gross margin depends on the industry:
| Margin Level | General Assessment |
|---|---|
| 70%+ | Excellent (software, pharma) |
| 50-70% | Above average |
| 30-50% | Average |
| Under 30% | Below average (but normal for some industries) |
Real Company Examples
| Company | Gross Margin | Industry |
|---|---|---|
| Microsoft | 70% | Software |
| Apple | 46% | Consumer Electronics |
| Nike | 45% | Apparel |
| Costco | 13% | Retail |
| Amazon | 47% | E-commerce/Cloud |
Why Gross Margin Matters
1. Pricing Power
High gross margins indicate strong pricing power and brand value.
2. Competitive Position
Companies with higher margins than competitors often have sustainable advantages.
3. Operating Leverage
Higher gross margins provide more cushion for operating expenses.
4. Trend Analysis
Declining gross margins may signal competitive pressure or cost increases.
Gross Margin vs. Operating Margin
| Metric | What It Excludes |
|---|---|
| Gross Margin | COGS only |
| Operating Margin | COGS + operating expenses (R&D, S&M, G&A) |
A company can have high gross margins but low operating margins if it spends heavily on sales or R&D.
Factors That Affect Gross Margin
Increase Gross Margin:
- Price increases
- Lower input costs
- Operational efficiency
- Product mix shift to higher-margin items
- Scale economies
Decrease Gross Margin:
- Competition and price pressure
- Rising costs (labor, materials)
- Promotions and discounts
- Supply chain issues
Limitations of Gross Margin
- Industry differences: Not comparable across different sectors
- Doesn’t include OpEx: High gross margin doesn’t mean profitable
- Accounting variations: Different COGS classifications
- Mix changes: Shifts in product/service mix affect margin
Related Financial Terms
This glossary entry is for educational purposes only and does not constitute investment advice.