Gross margin is a profitability metric that shows how much revenue a company retains after covering the direct costs of producing or delivering its product or service. It reflects the financial efficiency of a business’s core operations, before factoring in overhead, salaries, or marketing expenses.

It’s expressed as a percentage, showing how much of each dollar earned remains as gross profit.

A high gross margin means the company has more room to invest in growth, while a low margin could signal high operating costs or pricing challenges.

Formula: 

Gross margin (%) = [(Revenue - Cost of goods sold) ÷ Revenue] × 100

• Revenue = Total income from sales
• Cost of goods sold (COGS) = Direct costs like production, infrastructure, or delivery

Example:

If a company earns $100,000 in revenue and its infrastructure and support costs (COGS) are $30,000, the gross margin is:  [(100,000 – 30,000) ÷ 100,000] × 100 = 70%