How to Calculate Gross Profit Margin
Gross profit margin is a key profitability metric that shows what percentage of revenue remains after paying the direct costs of producing goods or services. It reveals how efficiently a company produces its product and how much room it has to cover operating expenses and generate profit.
The Formulas
Gross Profit = Revenue − Cost of Goods Sold (COGS)
Gross Profit Margin = (Gross Profit / Revenue) × 100%
Step-by-Step Example
A company has:
- Revenue: $500,000
- COGS: $300,000
- Gross Profit = $500,000 − $300,000 = $200,000
- Gross Profit Margin = ($200,000 / $500,000) × 100% = 40%
This means for every dollar of revenue, 40 cents remains after covering direct production costs.
Gross Margin by Industry
| Industry | Typical Gross Margin |
|---|---|
| Software (SaaS) | 70–85% |
| Retail | 25–50% |
| Grocery | 20–30% |
| Manufacturing | 20–40% |
| Restaurants | 60–70% (food costs only) |
| Construction | 15–20% |
Gross Margin vs. Net Margin
- Gross margin excludes operating expenses (salaries, rent, marketing)
- Operating margin = after operating expenses
- Net margin = after all expenses including taxes and interest
A company can have a healthy gross margin but poor net margin if operating expenses are too high.
Use our profit margin calculator to analyze any business's profitability.