In business accounting, gross margin is the percentage of sales revenue remaining after subtracting the cost of goods sold.
The calculation is gross profit divided by revenue, multiplied by 100. Gross profit is revenue minus the direct costs of producing or purchasing the goods sold. A company with $100 of revenue and $60 of cost of goods sold has a gross margin of 40%.
Gross margin helps show how efficiently a business prices products and controls direct production or purchasing costs. Retailers, manufacturers, and software companies may compare it across periods or against competitors, although accounting policies can affect comparability.
Gross margin is not the same as net profit margin. Net profit margin subtracts additional expenses such as marketing, administration, interest, and taxes. Operating margin also includes operating expenses. For service businesses, the exact classification of direct costs may differ, so the reported margin depends partly on the company’s accounting policies.