Financial Ratio Calculator
Gross Margin Calculator
Calculate your gross margin percentage from revenue and cost of goods sold. Understand what the result means for profitability, pricing, and lender assessment.
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What is Gross Margin?
Gross margin is the percentage of revenue remaining after deducting the cost of goods sold. It measures production efficiency and pricing power, and is a key ratio monitored by lenders and investors.
How is gross margin calculated?
Gross margin is calculated by subtracting the cost of goods sold (COGS) from revenue, then dividing the result by revenue to express it as a percentage.
Gross Profit = Revenue - Cost of Goods Sold
Gross Margin (%) = (Gross Profit - Revenue) - 100
Markup (%) = (Gross Profit - COGS) - 100
For example, if revenue is £1,200,000 and COGS is £780,000, gross profit is £420,000, giving a gross margin of 35%. The same figures produce a markup of 53.8%.
Gross margin and markup are related but different. Margin is expressed as a percentage of revenue; markup is expressed as a percentage of cost.
Gross margin benchmarks by sector
| Sector | Typical Gross Margin |
|---|---|
| Professional services | 50-80% |
| Software / SaaS | 60-80% |
| Construction | 15-30% |
| Manufacturing | 25-40% |
| Wholesale / distribution | 15-30% |
| Retail | 25-50% |
Note: these are indicative ranges. Individual business margins depend on pricing strategy, product mix, and operational efficiency.
Assumptions and caveats
- •COGS should include only direct costs: materials, direct labour, and production costs.
- •Overheads (rent, admin, marketing) are excluded from COGS and therefore from gross margin.
- •Gross margin alone does not indicate overall profitability. A high gross margin with high overheads may still result in a net loss.
- •Compare margins consistently - same period, same accounting treatment of costs.
Worked Example
Scenario
A food distribution business has revenue of GBP 2,200,000 and cost of goods sold of GBP 1,760,000.
Calculation
- Gross Profit = Revenue - COGS = 2,200,000 - 1,760,000 = GBP 440,000
- Gross Margin = (440,000 / 2,200,000) x 100
- Gross Margin = 20.0%
What This Means
A gross margin of 20% means the business retains GBP 0.20 from every GBP 1.00 of revenue after direct costs. For food distribution, this is within the typical range of 15-25%. The remaining 20% must cover operating expenses, finance costs, and profit. Lenders pay close attention to gross margin because it indicates pricing power and cost control - a declining margin may signal competitive pressure or rising input costs.
Frequently asked questions
Gross margin is the percentage of revenue that remains after subtracting the direct cost of goods sold (COGS). It measures how efficiently a business converts revenue into gross profit before accounting for overheads, tax, and financing costs.
Gross margin varies significantly by industry. Service businesses may achieve 50-80%, while manufacturing or wholesale businesses may operate at 20-40%. The key is whether the margin supports the business's overheads and generates sufficient net profit.
Gross margin only deducts cost of goods sold from revenue. Net margin additionally deducts all operating expenses, interest, and tax. Gross margin shows production/service profitability, while net margin shows overall profitability after all costs.
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