- What is gross profit?
- Gross profit = Revenue - Cost of Goods Sold (COGS). It represents the profit after direct production or procurement costs but before operating expenses like rent, salaries, and marketing. It is the starting point for assessing a product or business's profitability.
- What is the difference between gross margin and markup?
- Gross margin is profit as a percentage of selling price: (Price - COGS) / Price x 100. Markup is profit as a percentage of COGS: (Price - COGS) / COGS x 100. A 50% markup produces a 33.3% gross margin. They are related but measure different things.
- What is a good gross margin?
- Benchmarks vary significantly by industry. Software companies often achieve 70 to 80% gross margins. Retail is typically 25 to 50%. Manufacturing may be 20 to 40%. Hardware and physical products often range from 30 to 60%. Compare against industry peers rather than a universal standard.
- Why does gross margin matter more than revenue?
- Revenue growth is meaningless if COGS grows at the same pace or faster. Gross margin shows how much of each dollar of revenue is available to cover operating expenses and generate profit. Improving gross margin is often more impactful than increasing revenue.
