Profitability · updated October 21, 2026

What is gross margin and how is it calculated

Gross margin shows how many dollars are left from every $100 of sales after paying for what the product directly cost: materials, production, goods bought for resale. From this money the company then pays office salaries, advertising, research and interest.

Gross margin formula

Gross margin=Sales − Cost of salesSales× 100

Sales: Revenue over the last 12 months.
Cost of sales: The direct costs of the products or services sold.

Worked example

A shop sells goods for $100 that it bought for $70.

$100sales

$70cost of goods

30%gross margin

$30 is left, and it has to cover rent, salaries and everything else.

How to read gross margin

Below 20%retail, mass production

20% - 50%typical in industry and consumer goods

Above 50%software, strong brands, pharma

A high and stable gross margin shows the company can set its prices without losing customers. A falling margin points to pressure from competitors or costs.

When gross margin can fool you

Comparing across sectors: a supermarket with a 25% margin can be an excellent business, and a software maker with 60% a weak one.

Questions about gross margin

Why does the trend matter more than the level?

Because the level is set by the sector, but a margin that falls year after year shows the company is losing power over its customers or suppliers.

These explanations are for information only. They are not a recommendation to buy or sell.

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