Quick answer: Gross profit is Revenue − Cost of Goods Sold (COGS). Gross margin expresses that as a percentage of revenue: Gross Margin % = (Revenue − COGS) ÷ Revenue × 100. A business with $450,000 in revenue and $315,000 in COGS has $135,000 in gross profit, a 30% gross margin.
What is gross margin?
Gross margin is one of the first numbers investors, lenders and business owners look at to judge whether a company’s core pricing and production are working, before overhead, marketing, interest or tax are even considered. A higher gross margin means more of every revenue dollar is left over to cover those other costs and generate profit.
Gross margin depends entirely on an accurate Cost of Goods Sold figure. If you have not worked out COGS yet, see our COGS guide first.
The gross profit and gross margin formulas
Gross Profit = Revenue − Cost of Goods Sold (COGS)
Gross Margin % = (Revenue − COGS) ÷ Revenue × 100Gross profit is a dollar amount. Gross margin is that same relationship expressed as a percentage, which makes it easier to compare across periods or against other businesses of a different size.
How to calculate gross margin, step by step
- Find your revenue for the period, total sales before any costs are subtracted.
- Find your COGS for the same period. See our COGS guide if you need to work this out first.
- Subtract COGS from revenue to get gross profit.
- Divide gross profit by revenue, then multiply by 100 to express it as a percentage.
Worked example: continuing the furniture manufacturer
The furniture manufacturer from our COGS guide had $315,000 in COGS for the quarter, from selling furniture for $450,000 in revenue.
Gross profit: $450,000 − $315,000 = $135,000.
Gross margin: $135,000 ÷ $450,000 × 100 = 30.00%.
For every dollar of furniture sold, the company keeps 30 cents after covering direct production costs, before rent, marketing, admin and other overhead are paid out of that.
Gross margin vs. markup: the confusion that costs businesses money
Margin and markup use the same two numbers, revenue-side gross profit and cost, but divide by a different base, and mixing them up leads to systematically underpriced products.
Gross Margin % = Gross Profit ÷ Revenue × 100
Markup % = Gross Profit ÷ COGS × 100Using the same $135,000 gross profit on $315,000 of COGS: markup is $135,000 ÷ $315,000 × 100 = 42.86%, noticeably higher than the 30.00% gross margin. A business that wants a 30% gross margin but mistakenly prices using a 30% markup on cost will fall short of its target margin every time, because markup is measured against the smaller cost base rather than the larger revenue base.
Common gross margin mistakes
- Confusing margin with markup. A 30% markup on cost is not the same as a 30% gross margin; it works out to roughly 23.1% gross margin instead.
- Confusing gross margin with net margin. Gross margin only subtracts COGS from revenue. Net margin subtracts every expense, including overhead, interest and tax, and is always lower than gross margin for the same business.
- Using inconsistent COGS figures. Since gross margin depends entirely on COGS, any inconsistency in how COGS is calculated period to period, such as switching inventory valuation methods, distorts the margin trend.
- Comparing margins across very different business models without accounting for how much each classifies as COGS versus operating expense, which is not always consistent between industries or even between companies in the same industry.
Gross margin vs. net margin: Gross margin only accounts for COGS. Net margin (Net Profit ÷ Revenue × 100) subtracts every other business expense too, including rent, salaries not tied to production, marketing, interest and tax. A business can have a healthy gross margin and still post a net loss if operating expenses are too high.
Already have your revenue and COGS figures? Work out gross margin instantly.
Open the Gross Margin CalculatorGross Margin FAQs
What is the formula for gross margin?
Gross Margin % = (Revenue − Cost of Goods Sold) ÷ Revenue × 100. The dollar version, Revenue minus COGS, is called gross profit.
What is a good gross margin?
A “good” gross margin varies widely by industry, business model and how a company classifies costs as COGS versus operating expense, so there is no single universal target. The more useful comparison is usually a company’s own gross margin trend over time, or against direct competitors with a similar cost structure.
What is the difference between gross margin and markup?
Gross margin divides gross profit by revenue. Markup divides gross profit by cost (COGS). The same dollar amount of profit produces a lower margin percentage than markup percentage, since revenue is always larger than cost when a sale is profitable.
What is the difference between gross margin and net margin?
Gross margin only subtracts Cost of Goods Sold from revenue. Net margin subtracts every business expense, including overhead, marketing, interest and tax, so net margin is always lower than gross margin for the same business and period.
How do I improve gross margin?
Gross margin improves by raising prices, reducing Cost of Goods Sold (cheaper materials, more efficient labor, lower manufacturing overhead), changing product mix toward higher-margin items, or some combination of the three, without reducing revenue by more than costs fall.
Is gross margin the same as gross profit?
No. Gross profit is a dollar amount (Revenue minus COGS). Gross margin is that same figure expressed as a percentage of revenue, which makes it comparable across different revenue sizes and time periods.
Can gross margin be negative?
Yes, if Cost of Goods Sold exceeds revenue, gross profit and gross margin are both negative, meaning the business loses money on production alone before any other expenses are even considered.
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