Gross Margin
Definition
The percentage of revenue remaining after subtracting the direct cost of producing goods or services.
Explanation
Gross margin = (Revenue - COGS) / Revenue. It measures pricing power and production efficiency. Software companies typically enjoy 70-90% gross margins (minimal marginal cost per user). Hardware companies operate at 30-50%. Retailers at 25-40%. Commodity producers at 10-30%. Expanding gross margins indicate improving pricing power or cost efficiency. Declining margins signal competitive pressure, input cost inflation, or product mix deterioration. Gross margin is the first line of defense in profitability analysis.
Formula
Gross Margin = (Revenue - Cost of Goods Sold) / Revenue × 100%