Gross Margin: The One Number That Tells You If Your Business Is Viable

Why gross margin matters more than revenue#

Gross margin is the percentage of revenue remaining after the direct cost of producing or acquiring the goods you sell. A business with £2 million revenue and a 10% gross margin has £200,000 to cover all operating costs. A business with £800,000 revenue and a 60% gross margin has £480,000. The second business is in a fundamentally stronger position despite lower revenue. Revenue without margin context is a vanity metric — gross margin is the foundational health indicator of any product or trading business.

The gross margin formula#

Gross Margin % = (Revenue − Cost of Goods Sold) / Revenue × 100. Cost of Goods Sold includes: raw materials or supplier cost, direct manufacturing labour, freight and shipping to receive the goods, import duties and customs costs, and direct packaging. It excludes operating costs like rent, salaries for non-production staff, marketing, and software. These sit below the gross margin line as operating expenses.

Gross margin benchmarks by industry#

SaaS: 70-90%. Fashion and apparel: 50-65%. Consumer electronics: 15-30%. Homewares: 35-50%. Professional services: 60-80%. Restaurants: 60-70% (on food cost, before staff and rent). Manufacturing: 20-40%. The right benchmark for your business is your own industry — not a cross-sector average. The most important signal is the trend: is your margin improving or deteriorating over time?

Gross margin vs net margin#

Gross margin subtracts only the direct cost of goods. Net margin subtracts everything — COGS, operating expenses, interest, and tax. A business with 60% gross margin might have 5% net margin after all operating costs. Net margin is the ultimate profitability measure, but gross margin is the foundation. You cannot have a healthy net margin without healthy gross margin — it sets the ceiling for what operating costs the business can absorb.

How to improve your gross margin#

The four levers: raise prices (most direct impact if demand is not highly elastic), reduce cost of goods (negotiate better supplier terms, consolidate orders for volume discounts), reduce freight costs (better shipping terms, more efficient consolidation, closer suppliers), and improve product mix (sell more of your high-margin products and less of your low-margin ones). Most founders focus on increasing revenue — improving gross margin often produces much larger profit improvements for less effort.

Tracking gross margin with AskBiz#

AskBiz calculates your gross margin from connected sales and cost data and tracks it as a time-series metric. Ask it: what is my gross margin this month vs the same month last year, which product categories have the highest and lowest gross margin, what has happened to my overall margin since I switched suppliers. These answers tell you whether the fundamental economics of your business are strengthening or weakening.