Gross margin is gross profit expressed as a percentage of revenue.
It shows the share of sales left after cost of goods sold or cost of revenue, before other expenses. Return to the business plan glossary for related terms.
Try the markup and margin calculator with your own costs and prices.
Formula and calculation
Gross profit = Revenue − COGS
Gross margin (%) = (Revenue − COGS) ÷ Revenue × 100
Use revenue and cost of sales for the same period, net of applicable sales returns and discounts. Explain the cost classification, especially for services and manufacturing overhead. With zero revenue the percentage is undefined, so report the underlying amounts rather than dividing by zero.
Worked example: illustrative figures
Illustrative example: Elm Shelf is a fictional retailer with $50,000 of monthly revenue and $30,000 of cost of goods sold. All amounts are illustrative and use one consistent currency, USD or CAD; they are not retail benchmarks.
| Item | Amount |
|---|---|
| Monthly revenue | $50,000 |
| Monthly COGS | $30,000 |
| Gross profit | $20,000 |
| Gross margin | 40% |
Gross profit is $50,000 − $30,000 = $20,000. Gross margin is $20,000 ÷ $50,000 × 100 = 40%. Each sales dollar leaves 40 cents toward operating expenses, financing costs and taxes. Markup uses a different denominator: $20,000 ÷ $30,000 × 100 is approximately 66.7%.
How to interpret the result
Gross profit is a dollar amount; gross margin is a percentage. Neither is net profit or available cash. Contribution margin instead subtracts variable costs, which may include variable selling costs outside COGS and exclude fixed production costs inside COGS. Compare consistently defined measures.
Using this measure in a business plan
Link selling prices, product mix, purchasing costs and production assumptions to the forecast. Explain changes in gross margin and test higher input costs or discounts. Carry stock purchases and collections into cash flow because a positive margin alone does not pay bills.
For help connecting assumptions to the financial statements, see our financial modelling services and business plan writing services.
Related glossary entries
Frequently asked questions
Is gross margin the same as markup?
No. Margin divides gross profit by revenue; markup divides it by cost. The same sale therefore produces different percentages.
What is a good gross margin?
There is no universal percentage. Industry, product mix and cost policies matter. Assess whether gross profit supports the rest of the business and compare consistent definitions.
Can a service business calculate gross margin?
Yes. Deduct the defined cost of delivering services from service revenue, then divide by revenue. Explain which delivery costs are included.