Gross Profit Margin Calculator
What Is Gross Profit Margin?
Gross profit margin measures how much of each revenue dollar remains after paying the direct costs of delivering your product or service. It is one of the most fundamental measures of business health and the starting point for understanding whether your pricing and cost structure are working.
A high gross margin means you have room to cover overhead and generate profit. A low gross margin means you are working hard for very little, and any increase in overhead or drop in revenue can quickly push you into a loss.
The Formula
Gross Profit Margin = (Revenue - Cost of Goods Sold) / Revenue x 100
Definitions
Revenue is the total amount billed to customers for products or services delivered during the period.
Cost of Goods Sold (COGS) represents the direct costs of delivering your product or service. For a service business this is direct labor and materials. For a product business it includes raw materials, manufacturing labor, and direct production costs. It does not include overhead, sales expenses, or administrative costs.
A Worked Example
A landscaping company has the following annual financials:
Annual revenue: $1,800,000
Direct labor: $620,000
Materials and supplies: $380,000
Subcontractors: $140,000
Total COGS: $1,140,000
Gross profit: $660,000
Gross Profit Margin = $660,000 / $1,800,000 x 100 = 36.7%
For every dollar of revenue, this company retains 36.7 cents after direct costs to cover overhead and generate profit.
What Is a Good Gross Profit Margin?
It depends heavily on the industry. Service businesses typically run higher gross margins than product or construction businesses because their direct costs are lower. As a general benchmark, margins below 20% leave very little room for overhead and profit, while margins above 40% indicate strong pricing power or low direct costs.
The more important question is whether your gross margin is stable or trending in the right direction. A declining gross margin over time signals either rising direct costs or pricing pressure that needs to be addressed.
What Is a Good Gross Profit Margin?
Gross profit margin benchmarks vary significantly by industry. A software company may run 70% or higher. A service business might target 40-50%. A manufacturer might consider 25-35% healthy. A contractor or retailer may operate comfortably at 20-25%. The number itself is less important than whether it covers your overhead and leaves room for profit. Compare your margin to others in your specific industry rather than to a generic standard.