The gross margin is a business metric that indicates the proportion of turnover remaining after deducting the direct costs of manufacturing or providing products and services.
It shows how profitable a company’s core business is, before taking into account other costs such as administration, marketing or staff costs.
The calculation is carried out using the following formula:
\text{Gross Margin (%)} = \frac{\text{Turnover} – \text{Cost of goods sold}}{\text{Turnover}} \times 100
Direct costs (Cost of Goods Sold, COGS) include, for example:
- Production costs
- Cost of materials
- Cost of goods purchased
- directly attributable delivery and production costs
Gross Margin helps companies to:
- to assess the profitability of the core business
- To analyse cost structures
- Optimising pricing strategies
- to measure the efficiency of production and procurement
- Comparing companies within an industry
A high gross margin often indicates that a company:
- produces or purchases efficiently
- has pricing power
- offers attractive potential for profit
A low gross margin, on the other hand, may indicate:
- high production or procurement costs
- significant price pressure in the market
- low operational efficiency
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Gross margins play a particularly important role in SaaS and digital business models, as investors often look for high margins when assessing a company’s long-term scalability.
innoWerft helps founders to understand key financial indicators such as gross margin, analyse their profitability and build sustainable business models with attractive margin structures.