Gross margin formula
Gross margin = (Revenue − Cost of goods sold) ÷ Revenue × 100. The numerator is gross profit; the denominator is the revenue included in the same period or product view.
Example
With $10,000 of revenue and $6,000 of COGS, gross profit is $4,000 and gross margin is 40%. A 40% margin means 40 cents of each revenue dollar remains after the included direct costs; it is not the same as a 40% markup.
Choose the cost boundary
Document whether COGS includes materials, manufacturing, fulfillment, payment fees or support that scales with usage. Different boundaries can make two otherwise similar margins incomparable.
Use margin for a decision
Review gross margin by product, customer segment and channel, then pair it with volume, returns, discounts, support load and cash timing. A higher margin percentage is not automatically a higher contribution to the business.