What is gross margin?
You calculate it with a simple formula: (Revenue – COGS) / Revenue x 100. Because it deducts only cost of goods sold, it isolates how efficiently you produce or buy your products, separate from overhead like rent, salaries, and marketing. That makes it a clean read on whether your pricing and inventory costs leave enough room for the rest of the business. The SEC’s guide to financial statements treats “gross profit” and “gross margin” as the same subtotal.
Key characteristics
- Formula: Gross margin is (Revenue – COGS) / Revenue x 100. It is expressed as a percentage of revenue, not a percentage of cost.
- COGS is the only cost it deducts: That means direct materials, direct labor, and manufacturing overhead. Per IRS Publication 334, it excludes selling, general, and administrative expenses.
- The costing method changes it: FIFO, LIFO, and weighted average cost assign different costs to COGS, so the same sale can show a different margin. See inventory valuation methods for how each works.
- It varies widely by industry: Benchmark against your sector peers rather than a single universal target.
- It is different from markup: Margin is a percentage of revenue, while markup is a percentage of cost. This markup versus margin guide walks through the math.
Example
Take the retail illustration in IRS Publication 334. A business with $385,060 in net receipts subtracts $288,140 in cost of goods sold. That leaves $96,920 in gross profit, or about a 25% gross margin. For industry context, the NYU Stern margins-by-sector data shows that gross margins across 5,994 U.S. publicly traded companies averaged 37.76% as of January 2026. That range ran from about 23% in food processing to over 71% in software. Those figures cover public companies, so treat them as a reference point, not a target for a private small business.
Related terms
- cost of sales: a close relative of COGS that feeds the same gross profit line.
- the FIFO method: a specific costing approach that shapes your COGS figure.
- net margin: a broader profitability metric that deducts all expenses, not just COGS.
FAQ
What is a good gross margin?
It depends on your industry, so benchmark against sector peers rather than chasing a universal number. Public-company gross margins span a wide range, from roughly 23% in food processing to over 71% in software.
What is the difference between gross margin and gross profit?
Gross profit is the dollar amount left after you subtract COGS from revenue. Gross margin expresses that same amount as a percentage of revenue.
How does inventory management affect gross margin?
Because COGS drives gross margin, accurate inventory costing and clean COGS produce a truer margin figure. Fishbowl gives you that costing accuracy, and customer TSI Supercool saw a 10% increase in margins with proactive pricing strategies.