Utilix knowledge base
What Is Gross Margin?
By Utilix Editorial Team · Published May 6, 2026
Gross margin is the percentage of revenue that remains after subtracting the direct costs of producing your goods or services (called COGS — Cost of Goods Sold). It is one of the most widely used measures of business profitability.
The formula
Gross Profit = Revenue − COGS
Gross Margin = Gross Profit / Revenue × 100
Example: A business earns $100,000 in revenue and spends $60,000 on the products or services it sells.
- Gross Profit = $100,000 − $60,000 = $40,000
- Gross Margin = $40,000 / $100,000 × 100 = 40%
This means 40 cents of every dollar in revenue remains after covering direct production costs.
What counts as COGS?
COGS includes only the direct costs of what you sell:
| Include in COGS | Do NOT include in COGS |
|---|---|
| Raw materials | Sales & marketing |
| Manufacturing labour | Admin salaries |
| Product packaging | Software subscriptions (non-production) |
| Direct overhead (factory) | Rent (office, not factory) |
| Shipping to customer (sometimes) | R&D |
Indirect costs — sometimes called operating expenses (OpEx) — are subtracted below the gross profit line, affecting net margin but not gross margin.
Gross margin vs net margin
| Metric | What it subtracts | Shows |
|---|---|---|
| Gross margin | COGS only | Profitability of your core product |
| Operating margin | COGS + operating expenses | Operational efficiency |
| Net margin | Everything including tax & interest | True bottom-line profitability |
A company can have a high gross margin but still be unprofitable if operating expenses (salaries, rent, marketing) are out of control.
Gross margin vs markup
These two are often confused:
- Markup is profit expressed as a percentage of cost.
- Margin is profit expressed as a percentage of revenue.
| Scenario | Cost | Selling price | Markup | Margin |
|---|---|---|---|---|
| A | $60 | $100 | 67% | 40% |
| B | $40 | $100 | 150% | 60% |
A 100% markup means you doubled your cost — but this only gives a 50% margin.
Typical gross margins by industry
| Industry | Typical gross margin |
|---|---|
| Software / SaaS | 65–80% |
| Financial services | 50–70% |
| Healthcare | 40–60% |
| Retail (general) | 25–45% |
| Manufacturing | 25–40% |
| Grocery / food retail | 20–30% |
| Construction | 15–25% |
Low-margin businesses can still be very profitable if they operate at high volume with tight cost control.
Why gross margin matters
- Pricing decisions — knowing your margin tells you how much room you have to discount.
- Benchmarking — investors and acquirers compare gross margin against industry peers.
- Scalability — high-margin businesses (software, media) can grow revenue faster than costs.
- Unit economics — gross margin per unit shows whether each sale is fundamentally profitable before overhead.
Related tools and guides
- Profit Margin Calculator — try it
- Break-Even Calculator — a related tool
- What Is the Break-Even Point? — related guide