Utilix knowledge base
What Is Gross Margin?
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.