definition

Gross margin is a financial metric that shows how much money a company keeps after subtracting the direct costs of producing its goods or services. It is usually expressed as a percentage and calculated as:

Gross Margin = (Revenue – Cost of Goods Sold) ÷ Revenue × 100

Gross margin tells you what portion of each dollar of sales is profit before overhead, salaries, and other operating expenses. For example, if a company sells a product for $100 and the cost to make it is $40, the gross margin is 60%.

This metric is critical because it highlights the efficiency of production and pricing strategies. High-margin products, like luxury cosmetics or software subscriptions, can generate substantial profits without requiring huge sales volumes. By contrast, low-margin products, such as groceries or basic electronics, rely on scale and volume to be profitable.

Apple’s iPhone, for instance, has historically maintained very high gross margins compared to many consumer hardware products, thanks to strong brand power and premium pricing.

In retail and e-commerce, calculating gross margins is essential for setting prices, managing promotions, and ensuring sustainability. Thin margins mean even small mistakes in pricing or logistics can wipe out profitability.

This is also why much of global manufacturing is outsourced to countries with lower labor and production costs. Shaving a few percentage points off costs can dramatically improve gross margins.

For startups and investors, gross margin is more than just a number. It signals whether a business model is scalable and defensible. A healthy margin gives a startup room to invest in growth, marketing, and product development, while a weak margin often means constant pressure to cut costs or raise capital.