What Is Gross Margin?
Gross margin tells you how much money is left after paying for what you sold. It's one of the most important numbers in any business.
Key Takeaways
- Gross margin = (Revenue - Cost of Goods Sold) ÷ Revenue × 100.
- It tells you how efficiently you convert sales into profit before overheads.
- UK eCommerce averages 40–55% gross margin; below 30% is usually a red flag.
The formula
Gross margin is calculated as: (Revenue minus Cost of Goods Sold) divided by Revenue, expressed as a percentage. If you sell a product for £100 and it costs you £60 to make or buy, your gross margin is 40%. That £40 must cover your rent, staff, marketing, and everything else — and leave something as profit.
What counts as cost of goods sold?
COGS includes the direct costs of producing or purchasing what you sell: product cost, packaging, direct labour, inbound freight, import duties. It does not include marketing, rent, salaries for non-production staff, or software. Getting COGS right is essential — underestimating it inflates your apparent margin.
Why gross margin matters more than revenue
Two businesses can have the same revenue and very different futures. A £500,000 revenue business at 60% gross margin has £300,000 to cover overheads. At 20% gross margin, it has £100,000 — and is likely loss-making once overheads are included. Gross margin determines how much room you have to grow.
How to improve it
Raise prices (if the market allows), reduce supplier costs (negotiate, consolidate, switch), improve product mix (sell more high-margin products), and reduce waste and returns. Even a 3–5 percentage point improvement in gross margin can transform a business's profitability.