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Gross Margin Calculator

Plug in your revenue and COGS. Get a number, an industry benchmark, and plain-English advice on what to do about it.

Not sure where to find these numbers in your books? See where to find them in QuickBooks, Wave, or your accountant's report.

Choose an industry to see how your numbers compare to typical businesses like yours.

Top-line sales before any costs.

Direct costs to produce or deliver — materials, direct labour, freight in.

Enter your revenue and COGS above to see your gross margin and what it means.

What gross margin actually tells you

Gross margin is the share of every sales dollar that's left after the direct cost of producing or delivering what you sold. If you charged $100 for a job and the materials, direct labour, and freight cost you $65, your gross margin on that job is 35%.

It's not your profit. It's the money available to pay for everything else — rent, marketing, insurance, your salary, the truck payment, the software subscription you forgot you had. Gross margin is the upper bound on how well your business can ever do. Net profit is what's left after all the bills get paid.

Track gross margin monthly. It's a leading indicator: it moves before profit does. By the time net income falls, gross margin has usually been drifting for months.

The formula

Gross Margin = (Revenue − Cost of Goods Sold) ÷ Revenue

A worked example

A small construction company has:

  • Annual revenue of $2,400,000
  • Materials cost of $720,000
  • Direct labour on jobs of $960,000
  • Freight and equipment rental on jobs of $120,000

Total COGS = $720,000 + $960,000 + $120,000 = $1,800,000.

Gross margin = ($2,400,000 − $1,800,000) ÷ $2,400,000 = 25%.

That's right around the median for construction. It says: of every dollar billed, 25 cents is left to cover overhead, equipment depreciation, the owner's salary, and profit. If overhead runs $400,000 a year, then $600,000 of gross profit covers that overhead and leaves $200,000 for owner pay and profit. A real, viable, modestly-profitable construction business.

What goes in COGS — and what doesn't

This is where most calculators go wrong, and where most owners' gross margin numbers are off.

COGS includes the costs you wouldn't have if you didn't make the sale:

  • Direct materials and supplies consumed in producing what you sold
  • Direct labour — the hours of people whose work directly produces revenue (production staff, technicians on jobs, line cooks, fulfilment workers)
  • Subcontractor payments tied to specific jobs or sales
  • Freight in (the cost of getting raw materials to you)
  • Packaging that ships with the product
  • Payment processing fees, if you treat them this way consistently

COGS does NOT include:

  • Office rent — that's an operating expense
  • Sales and marketing salaries
  • Owner's salary unless the owner is directly producing billable work (and even then, treat with care)
  • General insurance, accounting fees, software subscriptions
  • Depreciation on equipment that isn't job-specific

The most common mistake is putting all labour into COGS. If your bookkeeper drops every employee's wages into "wages — COGS," you'll show an artificially low gross margin and think you have a pricing problem when you actually have a categorization problem. The reverse mistake is also common: leaving direct labour out of COGS because it's salaried rather than hourly. If a salaried technician's main job is producing billable work, their cost belongs in COGS.

When you re-categorize, re-categorize for all comparison periods. Otherwise the year-over-year change tells you nothing.

What's a "good" gross margin

It depends entirely on the industry. The same 35% gross margin is excellent for a grocery store and an emergency for a SaaS business. Rough orientation:

  • Professional services: 45–70%. The cost is mostly people, and people are expensive.
  • Construction and trades: 20–35%. Materials and labour eat most of the revenue.
  • Manufacturing: 25–40%. Highly variable by what's being made.
  • Retail (general): 30–50%. Specialty retail can run higher.
  • Restaurants and food service: 60–72%. Food cost typically runs 28–35% of revenue.
  • E-commerce: 30–55%. Highly dependent on whether shipping and returns are correctly accounted for.

These are starting points. Use the industry selector in the calculator above to see a more specific range and where your number sits within it.

Common mistakes

  1. Confusing gross margin with markup. Markup is the percentage above cost; margin is the percentage of the sale price. A 50% markup is a 33% margin. There's a separate calculator on this site that converts between them.
  2. Mixing gross and net revenue across periods. Whatever you do, do it the same way every period. If you compare a "gross revenue" margin to a "net revenue" margin, you'll think your margin moved when nothing changed.
  3. Forgetting freight and packaging. Especially in e-commerce, the cost of getting the product to the customer can take 5–10 points off the margin you thought you had.
  4. Putting the owner's salary in COGS at arbitrary levels. If the owner is producing the work, their cost belongs there — but at a market rate, not whatever they happened to draw last year. Distortions here make every other ratio meaningless.
  5. Computing gross margin only annually. It's most useful monthly, broken down by product line or service type. The annual aggregate hides the lines that are pulling the average down.

FAQ

Is gross margin the same as profit margin?

No. Gross margin is revenue minus COGS, divided by revenue. Profit margin (or net margin) is net income — what's left after every expense — divided by revenue. Gross margin is always larger than profit margin in a healthy business.

My margin moved four points last quarter. Where do I look?

First, check whether anything was reclassified between COGS and operating expenses; that's the most common cause of phantom margin shifts. If categorization is consistent, look at price changes, supplier cost changes, mix shift (selling more low-margin products), and labour efficiency on jobs.

Should I aim for the same gross margin on every product or service?

Usually no. A business with multiple product lines typically targets different margins for each, then optimizes the mix. The aggregate margin is a result, not a goal.

How does gross margin relate to break-even?

Break-even revenue is fixed costs divided by gross margin. A business with $400,000 in fixed costs and a 25% gross margin needs $1,600,000 in revenue to break even. If margin slips to 20%, break-even jumps to $2,000,000 — a 25% increase in required volume just to stand still. That's why a small margin slip is a big deal. The Break-Even Calculator uses your gross margin to compute the revenue you need and the margin of safety above it.

My accountant computes gross margin slightly differently. Who's right?

Both can be. The headline formula doesn't vary, but what gets included in COGS does — particularly around labour and overhead allocation. What matters most is consistency across periods, not which version you use. Ask your accountant which version they're applying and stick with it.