Gross Margin
BeginnerGross margin is gross profit expressed as a percentage of revenue. It shows how much of each unit of sales is left after paying the direct costs of the goods or services sold.
Gross margin is calculated by dividing gross profit by revenue. If a company sells products for 1,000,000 and their direct cost is 650,000, its gross profit is 350,000 and its gross margin is 35%. In other words, for every 100 of sales, 35 is left to pay for overheads and contribute to profit.
Gross margins vary widely between industries. Software companies often have very high gross margins, because extra copies cost little to produce. Supermarkets usually have low gross margins but make up for it with high sales volumes.
Changes in gross margin over time are revealing. A falling margin can signal rising costs, price competition or a shift towards lower-margin products. A rising margin can indicate stronger pricing power or better production efficiency.
In everyday conversation, "gross margin" is sometimes used to mean the gross profit amount rather than the percentage, so it is worth checking which is meant.
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