Gross Margin
Gross margin is the percentage of net sales revenue left after subtracting the cost of goods sold.
What is Gross Margin?
Gross margin describes the first profitability layer of a sale. It shows how much of each revenue dollar remains after the inventory cost attached to the products sold. That remainder still has to cover other business expenses.
In ecommerce, use realized net sales after discounts and returns, excluding sales tax collected for authorities. Match those sales with the corresponding product costs. A margin based on catalogue prices describes a pricing assumption; a margin based on completed sales describes actual trading.
Gross margin (%) = (Net sales − COGS) ÷ Net sales × 100
COGS means cost of goods sold. Revenue must be positive for this percentage to have its usual interpretation. Use the same reporting period and cost policy for both inputs.
A $75 product with a $30 cost
An accessories store sells a bag for $75 after discounts, excluding tax. Its inventory cost is $30. Gross profit is $45, and gross margin is $45 ÷ $75 × 100 = 60%. The business retains 60 cents per sales dollar before expenses outside COGS.
How to interpret it
The percentage measures product-level headroom, not the cash the owner can withdraw. Payment processing, outbound delivery, acquisition and overhead can consume the $45 in the example. A strong gross margin can therefore coexist with a net loss.
Read the rate alongside gross profit dollars. A store earning 60% on $10,000 of sales generates less gross profit than one earning 40% on $20,000. Neither the percentage nor the dollar amount alone describes the entire business.
Compare like with like. A change can reflect supplier prices, discounts or product mix; it can also reflect a different cost classification. A universal “good margin” threshold cannot account for every category, return pattern and operating model.
Common mistakes
Confusing margin with markup
The $45 surplus is 60% of the $75 selling price but 150% of the $30 cost. The denominator changes the answer.
Treating gross margin as final profit
Gross margin stops at COGS. Deducting advertising or rent within this calculation changes the metric; ignoring them when judging overall profitability changes the conclusion.