Quick Summary
Gross Margin indicates how efficiently a company produces and sells its products.
Gross Margin (or Gross Profit Margin) is a profitability ratio that measures the percentage of revenue that exceeds the cost of goods sold (COGS). It reflects how efficiently a company uses its resources to produce goods or services.
Gross Margin Formula
Gross Margin = ((Revenue - COGS) / Revenue) × 100
Or
Gross Margin = (Gross Profit / Revenue) × 100
Example
If a company has:
- Revenue: ₹100 lakhs
- Cost of Goods Sold: ₹60 lakhs
Gross Profit = ₹100 - ₹60 = ₹40 lakhs
Gross Margin = (₹40 / ₹100) × 100 = 40%
Industry Benchmarks
- Software/Technology: 70-90%+ (low COGS)
- Retail: 20-40% (high volume, lower margins)
- Manufacturing: 25-35%
- Groceries: 10-20% (very competitive)
Factors Affecting Gross Margin
- Pricing power and competition
- Raw material costs
- Manufacturing efficiency
- Product mix (high vs low margin products)
- Economies of scale
Key Points
- Measures production efficiency
- Higher is generally better
- Varies significantly by industry
- Gross Profit / Revenue × 100
- Before operating expenses and taxes