Gross Profit Margin
Gross profit as a percentage of revenue, measuring how efficiently the business converts revenue into profit after direct costs
What is Gross Profit Margin?
Gross profit margin is the percentage of revenue left after paying the direct cost of the goods or services sold. It shows how much each sale contributes towards overheads and profit.
It reflects pricing, product mix and the efficiency of buying and production, so it is one of the most basic measures of business health.
How this KPI is measured
- Function
- Finance
- Sub-function
- Financial Reporting
- Industry
- All Industries
- Type
- Lagging
- Impact
- Financial control
- Unit
- %
- Measurement frequency
- Monthly / Quarterly
- Formula
- (Revenue − Cost of Goods Sold) / Revenue × 100
How to calculate it
Subtract cost of goods sold from revenue, divide by revenue, and multiply by 100.
For example, if revenue is 10,000,000 and cost of goods sold is 6,000,000, gross profit margin is (10,000,000 - 6,000,000) / 10,000,000 x 100 = 40%.
Decide consistently what counts as a direct cost. Compare by product line, since margins often differ widely.
Where it is used
Pricing decisions
Check prices cover direct costs.
Product mix
Find which lines earn most.
Cost control
Spot rising input costs.
How to improve it
Tips and common mistakes
- A falling margin often signals cost pressure or excessive discounting.
- Compare within the same industry.
- Track margin by product, not only in total.
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