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AccountingPre-Product Market Fit

Gross Profit Margin

Quick Definition

The percentage of revenue remaining after subtracting the direct costs of producing goods or services sold.

What is Gross Profit Margin?

Gross profit margin shows how efficiently a company produces and sells its products. It measures the percentage of revenue that exceeds the direct cost of goods sold, before operating expenses are considered.

What's a Good Gross Margin?

SaaS companies typically achieve 70-80% gross margins. Ecommerce ranges from 25-50%. Manufacturing often runs 25-35%. Higher margins indicate pricing power and operational efficiency.

Improving Gross Margin

Increase prices, reduce direct costs, negotiate better supplier terms, improve production efficiency, or shift product mix toward higher-margin offerings. Use our pro forma income statement generator to project how margin improvements impact your bottom line.

Formula

Gross Profit = Revenue - Cost of Goods Sold (COGS)

Gross Profit Margin = (Gross Profit / Revenue) × 100

Example

Ecommerce store performance:

  • Revenue: $500,000
  • Product Cost: $200,000
  • Shipping Cost: $50,000
  • Payment Processing: $15,000

COGS = $200K + $50K + $15K = $265,000

Gross Profit = $500K - $265K = $235,000

Gross Margin = $235K / $500K = 47%

Related

Related Terms

Net Profit Margin

The percentage of revenue remaining as profit after all expenses, taxes, and interest are paid.

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COGS (Cost of Goods Sold)

The direct costs of producing and delivering your product or service, subtracted from revenue to calculate gross profit.

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Operating Profit Margin

The percentage of revenue remaining after deducting operating expenses, showing profitability from core business operations.

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