Gross margin

Gross margin shows how much of each sale is left after the cost of the goods. It is gross profit divided by sales. It tells you how much room you have to pay rent, salaries, electricity and still make a profit.

The formula

Gross margin % = (sales − cost of goods sold) ÷ sales × 100.

Example

A mobile accessories shop buys a phone cover for Rs 300 and sells it for Rs 500. Gross profit is Rs 200. Gross margin is 200 ÷ 500 = 40%.

The same shop also sells chargers, bought at Rs 1,600 and sold at Rs 2,000. Gross profit is Rs 400 a piece, but the margin is only 400 ÷ 2,000 = 20%. The charger earns more rupees per sale; the cover earns more per rupee of sales.

Margin is not markup

Markup is profit divided by cost, while margin is profit divided by sales. The phone cover has a markup of 200 ÷ 300, about 66.7%, but a margin of 40%. Mixing the two up is a common pricing mistake. A shopkeeper who wants a 40% margin and adds 40% to cost gets a price of Rs 420, and a margin of only 120 ÷ 420, about 28.6%.

Why it matters

Overall margin can look fine while some items lose money once discounts and returns are counted. Checking margin by item shows what to push, what to reprice and what to stop stocking.

How software handles it

Software that records purchase cost and sale price on every transaction can show profit by item and by period. Our guide on gross profit vs net profit explains how margin fits into the full profit picture.