💼 Ever wonder how businesses know whether they’re actually making money from selling a product? That’s where gross margin comes in. It’s one of the most important numbers in business—and lucky for us, it’s also super simple to calculate!
Let’s break it down together.
Table of Contents
🙋 What Is Gross Margin?
Gross margin shows how much money a company keeps after paying for the cost to make or buy the product—before other expenses like rent, salaries, or marketing.
Think of it like this:
Selling price minus cost to make it = what’s left to cover everything else.
It’s a quick way to see how profitable your product or service is.
📊 The Gross Margin Formula
There are actually two versions of the formula, and both are super handy:
💵 Gross Profit Formula:
Gross Profit = Revenue – Cost of Goods Sold (COGS)
📈 Gross Margin (%) Formula:
Gross Margin (%) = (Gross Profit / Revenue) × 100
Where:
- Revenue = what you earned from sales
- COGS = what it cost you to produce or buy what you sold
🧮 Let’s Try an Example
You own a little online candle shop 🕯️
- You sell a candle for $20
- It costs you $8 to make it (wax, jar, label, etc.)
Calculate Gross Profit
Gross Profit = $20 - $8 = $12Calculate Gross Margin (%)
Gross Margin = ($12 / $20) × 100 = 60%🎉 That means you’re making a 60% gross margin on each candle sold. Nice!
🧾 Why Gross Margin Matters
- 📊 It shows how efficiently you’re making and selling your product
- 💡 Helps you price your products wisely
- 💰 Higher gross margin = more money left for other business expenses
🚨 Common Mistake to Avoid
Don’t include operating expenses (like rent, marketing, or salaries) in your COGS.
Gross margin is all about the cost to produce the product, not run the whole business.
✅ Quick Recap
- Gross Profit = Revenue − COGS
- Gross Margin % = (Gross Profit ÷ Revenue) × 100
- Helps you understand how much money you’re really making per sale
- More margin = more room to grow your business!
Whether you’re selling cupcakes, t-shirts, or tech services, knowing your gross margin helps you make smarter decisions—and grow with confidence. 🙌