Gross margin is the percentage of sales revenue a business keeps after paying the direct cost of the goods it sold. It shows how much of every rupee of sales is available to cover overheads and produce profit. Expressed as a number rather than a percentage, the same idea is called gross profit.
Gross margin formula
Gross Margin (%) = ((Revenue − COGS) ÷ Revenue) × 100
Worked example
A Lahore footwear retailer sells Rs. 5,000,000 of shoes in a month. The cost of goods sold for those shoes is Rs. 3,250,000. Gross margin = ((5,000,000 − 3,250,000) ÷ 5,000,000) × 100 = 35%. For every Rs. 100 of sales, Rs. 35 is left to cover rent, salaries, marketing, and profit.
Why gross margin matters
Gross margin is one of the clearest signals of pricing health and product mix. A shrinking margin warns that costs are rising faster than prices, that discounting is too deep, or that low-margin lines are crowding out profitable ones. Tracking it by product and category — not just for the whole business — reveals exactly where profit is made and lost.
EloERP calculates gross margin in real time on every sale, product, and branch, so pricing decisions rest on current cost data rather than month-old estimates. Pair it with inventory turnover to see which products are both profitable and fast-moving.
Related glossary terms
Frequently asked questions
What is the difference between gross margin and markup?
Both compare price to cost but use a different base. Gross margin expresses profit as a percentage of the selling price, while markup expresses it as a percentage of the cost. A 50% markup on cost is only a 33% gross margin, so the two should never be confused when setting prices.
What is the difference between gross margin and net margin?
Gross margin deducts only the cost of goods sold. Net margin deducts all expenses — operating costs, interest, and tax — to show the final profit percentage. Gross margin measures product profitability; net margin measures the profitability of the whole business.
What is a good gross margin?
It varies widely by industry. Grocery retail often runs on thin gross margins of 10–25%, while software or specialty goods can exceed 60%. Compare against competitors in your sector and watch the trend over time rather than chasing a single target number.