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Gross Profit Margin
The percentage of revenue remaining after subtracting the direct costs of producing goods or services sold.
Formula
Gross Profit = Revenue - Cost of Goods Sold (COGS)
Gross Profit Margin = (Gross Profit / Revenue) × 100
Definition
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.
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%
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