What is the Gross Margin?
The Gross Margin formula is perhaps the most important formula for anyone working on a commercial business. It is especially critical for all people involved in any kind of commercial role such as in sales, marketing, product management and even in financial disciplines (such as accounting, finance, etc).
Gross Margin is the amount of money a company makes when they sell a product or service. In other words, it is the profit after we deduct the cost of goods from the sales revenues.
This profit is expressed either in terms of amount (an absolute number: the money profit) or in terms of percentage points (%).
Gross Margin expressed in value terms:
and expressed as a percentage:
The calculation can apply both when we talk for the sale of one single unit (e.g. when we want to evaluate how much profitable is a specific SKU) and for the sale of many items & SKUs (e.g. when we want to calculate our margin during a period of time). The examples below can further help us understand the calculation and use cases.
Example 1: Product A – Calculate the margin for a batch of units
(e.g. we would like to evaluate sales of Product A during previous month)
selling price / unit = $15
cost / unit = $10
Units sold: 100 PCs
Net Sales: 100 PCs x $15 = $1,500
Cost of Goods Sold: 100 PCs x $10 = $1,000
Gross Margin: $1,500 – $1,000 = $500
Gross Margin (%): ($1,500 – $1,000) / $1,500 = 33.33%
Example 2: Product B – Calculate the margin per unit
(e.g. we would like to evaluate if Product B is profitable enough to include in our product mix)
selling price / unit = $199
cost / unit = $169.15
Net Sales = selling price / unit
Cost of Goods Sold = cost / unit
Gross Margin: $199 – $169.15 = $29.85
Gross Margin (%): $199 – $169.15 / $199 = 15%