What is gross margin?
(Revenue − cost of sales) ÷ revenue; shows how profitable the product itself is.
In detail
Gross profit is the revenue from goods sold minus the cost of those goods themselves (purchase price or production cost); gross margin is gross profit as a share of revenue. It does not yet deduct rent, labor, freight and other expenses, and reflects “how much the goods themselves earn for every RMB 100 sold”.
For example
A product sells for RMB 100 and costs RMB 70 to buy. Gross profit is RMB 30, so the gross margin is 30%.
How companies use it
Calculate gross margin separately by product, customer and channel to find the businesses that truly make money. If sales are rising while gross margin is falling, watch out for growth that is being bought with price cuts.
Common misconceptions
Treating gross profit as profit. A high gross margin does not mean the company is necessarily making money; net profit after all expenses is the final result.
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