Definition
Gross margin is the share of each sale that is left as gross profit, shown as a percentage of the selling price. A 40 percent margin means 40 cents of every dollar of sales is left after the product cost.
The formula
The denominator is the selling price. That is the one detail people most often get wrong, and it is what separates margin from markup, which divides by cost.
A worked example
A hardware store buys a box of screws for $6 and sells it for $10. Profit per box is $4. Margin = 4 / 10 = 40 percent. Markup on the same box = 4 / 6 = 66.7 percent. Same product, same profit, two different percentages.
Margin tells you what a sale is worth. If the store sells $5,000 of products at an average 40 percent margin, it keeps $2,000 as gross profit before running costs.
Why it matters
- Comparing products: a $2 item at 50 percent margin can earn more than a $20 item at 5 percent if it sells much more often.
- Setting prices: to hit a target margin, price = cost / (1 - margin). For a 30 percent margin on a $7 cost: 7 / 0.70 = $10.
- Spotting squeeze: when a supplier raises prices and you do not, margin falls even if sales stay flat.
The markup and margin calculator converts between the two, and how to price products shows how to choose a target.
Related terms
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