Definition
Gross margin is the percentage of revenue that remains after subtracting the cost of goods sold (COGS). It measures how much of each sale is left to cover everything else: marketing, shipping, overhead and profit.
Gross margin is the number that turns revenue into a business. Two stores with identical revenue can have completely different economics depending on their margin, because margin determines how much of every sale actually survives to fund growth.
How to calculate gross margin
The formula is:
Gross margin = ((Revenue − COGS) ÷ Revenue) × 100
For example, a product that sells for 100 dollars and costs 35 dollars to make has a gross margin of 65%. Do not confuse gross margin (a percentage of revenue) with markup (a percentage of cost); they describe the same sale from different angles and give different numbers.
Gross margin sits above net margin. Gross margin subtracts only the cost of goods; net margin also subtracts advertising, shipping, fees and overhead. You can work through the full cost stack to net profit with the ecommerce profit calculator.
Why gross margin matters for revenue
Gross margin sets the rules for almost every other decision. It defines your break-even ROAS: a store with a 40% margin needs a much higher return on ad spend to profit than one with a 70% margin. It caps how much you can afford to discount before a sale loses money. And it determines the true value of a customer, because customer lifetime value is margin-adjusted, not revenue-based.
Watch gross margin over time, not only once. Rising product or shipping costs erode it quietly, and a margin that drifts down can turn yesterday's profitable price into today's loss without any change in revenue. For this reason, revenue figures read without margin are misleading. A channel, product or promotion that drives strong revenue can be unprofitable once margin is applied, which is why serious analysis converts revenue into margin before drawing conclusions. Our guide to revenue recovery stresses measuring recovered revenue net of costs for exactly this reason.
From a Revenue Intelligence perspective, margin is what makes a priced leak honest. A recovered sale is only worth its margin, not its revenue, so pricing leaks with margin in mind, as the Revenue Intelligence framework describes, keeps the numbers grounded in profit rather than top line.
Related metrics
Gross margin underpins ROAS, which it converts into a break-even target, and customer lifetime value, which is margin-adjusted by definition. Together they move analysis from revenue, which flatters, to profit, which decides.
In short
Gross margin is revenue minus cost of goods, as a share of revenue. It sets your break-even, caps your discounting, and defines the true value of a customer. Read revenue through margin, and a lot of apparently strong numbers turn out to be thinner than they looked.