Glossary
gross margin
Also called gross profit margin, gross margin percentage
Gross margin is the share of revenue left after the direct costs of producing or delivering what you sold, before any overheads such as rent, salaries or marketing.
- How it's calculated
- Gross margin % = (Revenue − Cost of sales) ÷ Revenue × 100
- Cost of sales means the costs that rise and fall with what you sell: materials, production, packaging, shipping, payment fees. Rent and head office salaries are not cost of sales, because you pay them whether you sell anything or not.
Gross margin tells you how much of each sale is available to pay for everything else. A business selling a product at £4.00 that costs £1.06 to produce keeps £2.94, a gross margin of about 74%.
Why it matters more than revenue#
Revenue tells you how much activity you have. Gross margin tells you whether that activity is worth having. Two businesses turning over £1m are in completely different situations at 20% and at 70%, because one has £200,000 to cover overheads and the other has £700,000.
It also determines how much extra revenue a new cost requires. At 70% margin, a £70,000 salary needs £100,000 of additional sales to pay for itself. At 25% margin the same hire needs £280,000.
In a forecast#
If your model holds prices and unit costs as inputs, gross margin is derived rather than assumed, and it changes automatically when your product mix shifts. That matters because blended margin moves when you sell more of one thing and less of another, even if no individual price has changed.