Gross Margin

Gross Margin is the percentage of revenue remaining after deducting the cost of goods sold (COGS). It measures how efficiently a company produces its products and its ability to price them above cost.

Formula

Gross Margin = (Revenue - Cost of Goods Sold) ÷ Revenue × 100

If a company has $1 million revenue and $400,000 in COGS, gross margin is 60%.

Example

Apple (AAPL) reports revenue of $400 billion and cost of goods sold of $210 billion, for a gross margin of 47.5%. Microsoft (MSFT) has a gross margin around 70% because software has lower production costs than hardware. Amazon (AMZN) has lower margins (35-40%) due to retail's thin margins.

How to Interpret It

• Higher gross margin: The company has better pricing power, lower production costs, or a premium product. Typical for software (60-90%) or luxury goods (60-70%).
• Lower gross margin: Typical for retailers (20-40%) or commodities (5-15%). Low margins require high volume to be profitable.
• Rising gross margin: Improving efficiency, successful price increases, or a shift to higher-margin products.
• Declining gross margin: Commoditization, rising input costs, or pricing pressure from competitors.
• Gross margin by segment: Large companies break down margins by business unit to show which divisions are most profitable.

Limitations

• Gross margin doesn't account for operating expenses (R&D, marketing, administrative), so it's not the final profit.
• Different accounting for COGS can distort margins; manufacturing-heavy companies capitalize more costs; service companies capitalize less.
• Seasonal businesses (retail) can have volatile quarterly gross margins.
• Industry matters hugely; comparing a retailer's 30% margin to a software company's 70% margin is not meaningful.

Related Terms

• Operating Margin — profit from operations as a percentage of revenue
• Net Margin — net profit as a percentage of revenue
• Cost of Goods Sold — direct costs of producing goods
• Profitability — ability to generate profit