What Is Gross Margin?
Gross margin is the share of revenue left after subtracting the direct costs of delivering a product or service, shown as a percentage.
How it works
The formula in words: gross margin equals revenue minus cost of goods sold, divided by revenue. Cost of goods sold (COGS) includes the direct costs of producing and delivering what you sell, such as materials, manufacturing, shipping, hosting and customer support for a software product. It generally does not include marketing, product development or general overhead, though accounting treatment varies, so ask your accountant how to classify costs.
Gross profit is the dollar amount. Gross margin is that amount as a percent of revenue.
Example
For example, a business has $100,000 in revenue and $40,000 in direct costs. Gross profit is $60,000 and gross margin is 60 percent. That 60 percent has to pay for everything else: salaries, marketing, rent and profit. If direct costs rise to $55,000, gross margin falls to 45 percent.
Why founders care
Gross margin shows how much room you have to spend on growth and overhead. Software often has higher margins than physical goods because copies cost little to deliver, but it varies by business. It is a key input to lifetime value and break-even, so improve it with pricing, supplier terms or lower delivery costs.
Common mistakes
- Leaving delivery costs, like support or hosting, out of COGS.
- Mixing gross margin with net margin, which includes all expenses.
- Underpricing early because the cost of your own time is not counted.
Frequently asked questions
What is a good gross margin?
It varies a lot by industry. Software businesses often have higher margins than retail or manufacturing. Compare to similar companies rather than a single target number.
What is the difference between gross margin and profit margin?
Gross margin subtracts only direct costs of delivery. Net profit margin subtracts all expenses, including overhead, marketing and taxes, so it is lower.
Related terms
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General information, not legal, tax or financial advice. Reviewed 11 November 2026.