Definition
Gross margin = (Revenue − Cost of Goods Sold) ÷ Revenue. It measures how profitable each unit of sale is before any overhead — rent, admin staff, marketing — is subtracted. The absolute amount left after COGS is gross profit; expressed as a percentage of revenue, it is gross margin.
A healthy gross margin depends on the industry. Software businesses often run 70–90 percent. Service businesses commonly run 40–60 percent. Physical goods can be anywhere from 20 to 60 percent, depending on materials and manufacturing model.
Why it matters
Gross margin is the floor for everything else. If gross margin is too low, no amount of overhead cutting will rescue the business. The fix is pricing, sourcing, or product mix — not back-office cost reduction. Owners who track gross margin per product line, customer, and channel find leaks the P&L hides.
Where this appears in your tools
The Profit Leak Analyzer uses gross margin as one of the core inputs to find quiet margin erosion. The tax calculator uses gross margin (alongside operating costs) to estimate net profit and the corresponding income tax reserve.
Example
A 10,000 project costs 5,500 to deliver (people time + a subcontractor). Gross profit is 4,500 and gross margin is 45 percent. Drop the project price to 9,000 with the same costs and gross margin falls to 39 percent — a six-point cut on the price erases four points of margin.
Common confusion
Owner-operators often forget to include their own delivery time in COGS, which inflates gross margin and hides the fact that the work is barely profitable once their hours are valued at a market rate.