What Is Gross Margin? Definition & Formula

Gross margin is your gross profit expressed as a percentage of revenue — the share of every sales dollar left after the direct cost of what you sold.

The formula: (Revenue − Cost of Goods Sold) ÷ Revenue. If you sell $100,000 and your COGS is $40,000, your gross profit is $60,000 and your gross margin is 60%. That 60% has to cover all your overhead — rent, marketing, admin — and whatever's left is profit.

Why owners watch it monthly: gross margin is the earliest warning system for a pricing or cost problem. A margin sliding from 62% to 59% to 56% signals rising input costs or under-pricing — long before it shows up as a cash crunch. Because it's measured before overhead, it isolates the health of your core product or service.

Gross margin vs. net margin: gross margin is profit after direct costs only; net margin is profit after everything, including overhead and taxes. Watching both tells you whether a profit problem is in your pricing (gross) or your overhead (net).

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Gross Margin FAQ

What is gross margin?

Gross margin is gross profit as a percentage of revenue — calculated as (Revenue minus Cost of Goods Sold) divided by Revenue. It shows how much of each sales dollar is left after direct costs to cover overhead and profit.

What is a good gross margin?

It varies widely by industry — service businesses often run high gross margins while restaurants and retail run much lower. What matters most is the trend: a gross margin that's stable or rising is healthy; one that's steadily declining signals rising costs or under-pricing.

Part of the Tides Bookkeeping Glossary — and the complete guide to small business bookkeeping.