What gross margin tells you
Gross margin is the share of each sale left over after paying for the goods themselves. It's the money available for everything else: rent, wages, marketing, and eventually profit. If it's too thin, no amount of cost-cutting elsewhere will save the business.
gross margin = (revenue − cost of goods sold) ÷ revenue × 100
Example
In March a candle maker sold 400 candles for $9,600 in total. Wax, wicks, jars, labels and shipping supplies cost $3,840.
Gross profit is $9,600 − $3,840 = $5,760. Gross margin is $5,760 ÷ $9,600 = 60%. Per candle, that's a $24 average price, $9.60 cost and $14.40 of gross profit.
Getting cost of goods right
Most margin mistakes come from leaving costs out. Sellers often count the product price but forget inbound freight, packaging, marketplace commission or card fees. Each one is small, together they can move gross margin by ten points or more.
A simple test: if a cost goes up when you sell one more unit, it belongs in cost of goods. If it stays the same whether you sell ten units or ten thousand, it's an operating expense.
Gross margin vs markup
The same sale gives a higher markup than margin, because markup divides by the smaller number. The 60% gross margin above is a 150% markup. When a supplier or a colleague quotes a percentage, check which one they mean.