What Is Gross Profit Margin?
Formula, how to read it, and a worked example.
Home › Accounting Glossary › Gross Profit Margin
| Based on | Gross profit |
|---|---|
| Related | Net profit margin |
| Topic | Financial accounting · Profitability ratios |
Gross profit margin in plain English
It answers: “For every 100 of sales, how much is left after paying for the goods?” A higher margin means the business keeps more of each sale to cover running costs and profit.
Worked example
Revenue is 50,000 and cost of goods sold is 30,000.
Gross profit = 50,000 − 30,000 = 20,000. Gross profit margin = 20,000 ÷ 50,000 × 100 = 40%.
If the next year gross profit is 27,000 on revenue of 60,000, the margin is 27,000 ÷ 60,000 × 100 = 45%, an improvement even though revenue grew.
- Confusing margin with mark-up. Margin is a percentage of the selling price. Mark-up is a percentage of cost.
- Comparing margins across very different industries.
Frequently asked questions
What is a good gross profit margin?
It depends on the industry. Compare with similar businesses and with the business’s own past results.
What is the difference between margin and mark-up?
Margin is profit as a percentage of selling price. Mark-up is profit as a percentage of cost. For a 40% margin, the mark-up is about 66.7%.
How can a business improve its gross margin?
Raise selling prices, reduce the cost of purchases or production, or sell a more profitable mix of products.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.