What is gross margin?
How is gross margin calculated?
Gross margin starts with gross profit, which is revenue minus the cost of goods sold, the direct cost of delivering what you sell. You then divide gross profit by revenue and state it as a percentage. Suppose a business earns 10,000 in revenue and the direct cost of delivering it, hosting and payment fees, is 2,000. Gross profit is 10,000 − 2,000 = 8,000, and gross margin is 8,000 ÷ 10,000 = 0.8, or 80 percent. That 80 percent is what remains to cover everything else.
What counts as cost of goods sold?
Only the costs that rise directly with each unit sold. For a software product that usually means hosting, third-party service fees, and payment processing; for a physical product it means materials and manufacturing. The rent, the finance team's salaries, and the marketing budget are real costs, but they are overheads rather than the direct cost of delivery, so they sit below the gross margin line and are handled separately.
How is gross margin different from net margin?
Gross margin measures the core offering; net margin measures the whole business. Net margin subtracts overheads, salaries outside delivery, interest, and tax from what gross margin leaves. A company can show a healthy 80 percent gross margin yet still run at a loss if its overheads outstrip that gross profit. Both figures live on the profit and loss statement, one near the top and one at the bottom, and reading them together tells you where the money goes.
Reading gross margin from an export
Gross margin is usually read from a profit and loss export, such as a CSV from QuickBooks that lists revenue and costs by category. Rather than sort direct costs from overheads by hand, you can open the file and ask for revenue, cost of goods sold, and the resulting margin in plain English. Paperswift runs the calculation in your browser, and only your column names and their types are sent when you ask, never the values in your rows.
Frequently asked questions
How is gross margin calculated?+
Subtract the cost of goods sold from revenue to get gross profit, then divide gross profit by revenue and express it as a percentage. Cost of goods sold covers the direct costs of delivering the product, such as hosting, payment fees, or materials. Overheads like rent, salaries outside delivery, and marketing are excluded from this calculation.
What is the difference between gross margin and net margin?+
Gross margin subtracts only the direct cost of delivery, showing how profitable the core offering is. Net margin subtracts everything else too, including overheads, salaries, interest, and tax, showing what the business ultimately keeps. A company can have a strong gross margin yet a thin net margin if its overheads are heavy relative to sales.
What counts as cost of goods sold?+
Cost of goods sold is the direct cost of delivering what you sell. For software that often means hosting, third-party service fees, and payment processing; for physical products it means materials and manufacturing. The test is whether a cost rises directly with each additional unit sold. Fixed overheads that do not scale that way are excluded.
Why does gross margin matter?+
Gross margin sets the ceiling on profitability, since everything else is paid out of it. A higher margin leaves more of each sale to cover overheads and fund growth, and it shapes how much a business can afford to spend on acquiring customers. Investors watch it closely because it reveals the underlying economics of the product.
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Start free todayLast updated · by Stefan