gross margin
The percentage of revenue remaining after subtracting the cost of goods sold (COGS), representing profitability before operating expenses.
Example
“Software companies often have 70-80% gross margins because code is cheap to replicate once written.”
Memory Tip
Gross margin = profit at the GROSSEST (most basic) level — before all the other costs.
Why It Matters
Gross margin helps you understand how efficiently a business converts sales into actual profit before paying for operations. For consumers and investors, it reveals whether a company has room to cover expenses and still remain profitable, which affects product pricing, job security, and investment returns.
Common Misconception
Many people confuse gross margin with net profit margin and think they represent the same thing. Gross margin only accounts for production costs, while net margin includes all expenses like salaries, rent, and taxes, making net margin always lower than gross margin.
In Practice
A clothing retailer buys shirts for 15 dollars each and sells them for 50 dollars, generating 35 dollars in gross profit per shirt. With 10,000 shirts sold monthly, that is 350,000 dollars in gross profit on 500,000 dollars in revenue, equaling a 70 percent gross margin before subtracting store rent, employee wages, and marketing costs.
Etymology
From Latin 'grossus' (large, in total) + 'margo' (edge, border).
Common Misspellings
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Related Terms
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See Also
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