Gross Margin Explained

What gross margin means

Gross margin expresses gross profit as a percentage of revenue. It's one of the fastest ways to see whether your core pricing makes sense.

Why it matters for small business

Two businesses with the same revenue can have very different gross margins. A higher gross margin means more money left to cover overhead and produce profit. It's also a fairer comparison than raw dollar amounts across different periods or product lines.

Simple formula

Practical example

A small café earns $12,000 in revenue. COGS (coffee, milk, pastries, packaging) is $4,200, so gross profit is $7,800.

For every $1 of coffee sold, 65 cents is available to pay rent, staff, and everything else.

What's a "good" gross margin?

It depends on the business:

• Grocery and retail: often 20–40%
• Restaurants and cafés: often 55–70%
• Software and digital services: often 70–90%
• Construction and trades: often 20–35%

What matters most is the trend over time and how it compares to similar businesses in your area.

Common mistakes

• Confusing margin with markup. A 50% markup is not a 50% margin — see Markup vs Margin.
• Discounting without doing the math. A small price cut can take a big bite out of margin.