Gross margin
What is left of a sale after the direct cost of delivering it, as a percentage of revenue.
Gross margin is what is left of a sale after the direct cost of delivering it: revenue minus the cost of goods sold, divided by revenue, as a percentage. A $100 sale that costs $30 to fulfil carries a 70% gross margin.
The number matters because it decides how much of every new sale is available to pay for everything else — the tools, the salaries, the marketing that produced the sale in the first place. Two businesses with identical revenue and different gross margins are not the same business, and the low-margin one has to sell far more to stand still. It is also where a pricing conversation should start and rarely does: raising a price lifts gross margin by the full amount, because the direct cost does not move.
The common error is counting only the invoice from a supplier. Direct cost includes the hours you personally spend delivering, priced at what you would have to pay someone else to do them. Leave your own time out and every service business looks like a software company.
Worked: you charge $4,000 for a project. Subcontracted design is $600, licences bought for the job are $200, and you spend 30 hours at a replacement cost of $40 an hour — $1,200. Direct cost is $2,000, so gross margin is 50%. Cut your own hours to 15 and the same project runs at 65% without charging a dollar more.
Also known as
- gross profit margin
- COGS margin
Relevant for
- Founders
- Gross margin is the ceiling on how fast you can grow without outside money — every point you add is growth that funds itself.
- Creators
- A sponsorship and a digital product can bring in the same revenue and leave you with wildly different amounts of it; margin is how you decide which one to sell twice.
- Business owners
- Price your own hours into direct cost, or the practice looks profitable right up to the month you try to hire someone to do them.