Gross Profit Margin
Gross profit (revenue minus cost of goods sold) divided by revenue. Measures pricing power and direct-cost efficiency before any operating, financing, or tax effects.
When to use: The first profitability ratio analysts look at. Compare across firms in the same industry — gross margin gaps reflect pricing power, brand strength, or scale advantages. Trend matters too: rising gross margin signals strengthening competitive position; falling margin can indicate price competition or input-cost pressure.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| GrossMargin | Gross Profit Margin | Gross profit divided by revenue | % |
| Sales | Annual Sales | Annual revenue (net sales) | $ |
| COGS | Cost of Goods Sold | Annual cost of goods sold | $ |
Real-Life Examples
Example 1: Branded Consumer Goods
Revenue $2,000M, COGS $700M.
Given
Step-by-Step
65% gross margin — premium territory, typical of branded consumer goods, software, and luxury. Compare to commodity producers (often 20-30%) to see how much pricing power the brand commands.
Frequently Asked Questions
Software / SaaS: 70-85%. Branded consumer goods: 40-65%. Industrial / manufacturing: 20-35%. Commodity producers: 10-20%. Retailers: 20-40% (varies). Use industry comparisons; absolute level alone is not informative.
Input cost inflation, price competition, customer mix shift, or unfavorable product mix. Persistent gross-margin decline is one of the strongest leading indicators of competitive erosion.