Business, finance and operations
Gross margin
Gross profit as a percentage of revenue.
- Business, finance and operations
Definition
Gross profit shown as a percentage of revenue. It shows how much of each euro of sales is left after direct costs.
Example
A company invoices €10,000 of revenue and incurs €6,000 of cost of goods sold. Gross profit is €4,000 and gross margin is 40%.
See how it works
Gross margin = (€10,000 − €6,000) ÷ €10,000 × 100 = 40%.
Check your understanding
Common mistake: Gross margin is not the same as gross profit in currency, markup or net profit after all expenses.
What happens to gross margin when costs rise but revenue stays fixed?
Show explanation
It falls, assuming the cost increase is included in cost of goods sold.
For your role
Choose your role to see what this term means in your work.
Why it matters
It shows whether prices cover the direct cost of what is sold, before overheads. A falling gross margin is often the first sign of pricing pressure or rising input costs.
Where it is used
Profit and loss reviews, pricing decisions and product reviews. Used by finance analysts, FP&A, pricing analysts, product managers and sales leaders.
How to calculate it
Gross margin % = (revenue - cost of sales) ÷ revenue × 100
Worked example
In July to September 2025 Raket Parts B.V. had revenue of €18,476,412 and direct costs of €5,969,562 (raw materials, bought-in components and subcontracted processing). Gross profit = €12,506,850. Gross margin = €12,506,850 / €18,476,412 x 100 = 67.7%.
Raket books production staff in a separate staff cost account. If those wages were treated as cost of sales, the gross margin would be lower, which is exactly why definitions need checking.
Raket Parts B.V. is a fictional company created for Insyt.
Definitions vary. What goes into cost of sales varies: some include production labour, factory costs, freight or packaging, others only materials. Check how your organisation calculates it.