Gross margin is revenue minus the cost of goods sold (COGS), expressed as a percentage of revenue. COGS covers the direct costs of delivering what you sell, such as materials, manufacturing, payment processing or, for software, hosting, support and third-party services tied to serving customers. Overheads such as marketing and general administration are not included.
Why it matters
Gross margin shows how much of each sale is available to pay for development, marketing, salaries and profit. It differs widely by business type: software companies often report high gross margins, while retailers and hardware firms usually report lower ones. It also guides pricing and is a central input into unit economics. Accounting definitions differ between countries and companies, so check how COGS is defined before comparing.
Example
Revenue: 1,000,000
COGS: 300,000
Gross profit: 700,000
Gross margin = 700,000 / 1,000,000 = 70%Common mistakes
- Mixing gross margin with gross profit (an amount) or with net margin (after all expenses).
- Excluding hosting or support costs from SaaS COGS to make the figure look better.
- Confusing margin with markup, which is profit divided by cost, not by price.
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