Gross margin
Also called gross margin percentage, gross profit margin, GM%
Reviewed by Dasha ShakovVP Marketing, Proton
Updated
What is gross margin?
Gross margin is the share of sales a distributor keeps after paying for the goods it sold: gross margin % = (revenue − COGS) ÷ revenue. An item sold for $100 that cost $75 earns $25 of gross profit, a 25% gross margin.
How it works
Gross margin is easy to confuse with markup, which divides the same $25 by cost instead and calls it 33%. Distributors talk about margin in two forms: as a percentage (“we need 28% on that”) and in dollars, called gross profit or GP dollars. Many distributors pay sales commission on GP dollars. A low-margin order can also be worth taking when the dollars are large and the cost to serve is low.
The margin on an order depends on which cost the ERP uses: average cost, replacement cost or cost after rebates. That is why a rep’s screen and the finance report can disagree about the margin on one order.
Gross margin example
Quote A is $1,000 at a 30% margin, or $300 of gross profit. Quote B is $5,000 at 18%, or $900, three times the gross profit at the lower percentage.
Often confused
Related terms
- MarkupMarkup is the amount added to an item’s cost to set its selling price, expressed as a percentage of cost: markup % = (price − cost) ÷ cost.
- Cost of goods sold (COGS)Cost of goods sold (COGS) is the cost of the products a company sold during a period.
- Net marginNet margin is the percentage of revenue a company keeps as profit after all expenses, including COGS, operating expenses, interest and taxes.
- Gross margin return on inventory investment (GMROI)Gross margin return on inventory investment (GMROI) is the gross profit a distributor earns for each dollar it has invested in inventory.
- Margin leakageMargin leakage is profit a distributor loses through many small, often unnoticed gaps between the price or cost it should have had and what it got.
