Gross Margin
The percentage of revenue remaining after deducting cost of goods sold, indicating pricing strategy effectiveness and production efficiency before operating expenses.
Gross Margin
The percentage of revenue remaining after deducting cost of goods sold, indicating a company’s efficiency in using labor and supplies in production and its pricing strategy effectiveness.
For example, a manufacturer with quarterly sales of $5 million and cost of goods sold of $3 million would have a gross profit of $2 million and a gross margin of 40% ($2 million ÷ $5 million), meaning 40 cents of each sales dollar remains after covering direct production costs.
Gross margin (expressed as a percentage) differs from gross profit (expressed as a dollar amount). Higher margins provide more cushion to cover operating expenses and generate operating profit. Declining gross margins may signal pricing pressure, increasing input costs, production inefficiencies, or unfavorable sales mix shifts. Margins vary significantly across industries, with software and service businesses typically enjoying higher margins than retailers or manufacturers. Companies often focus on strategies to improve gross margin through more efficient production, better supplier relationships, product mix optimization, or premium pricing.