What is Gross Margin?
Gross margin is the percentage of revenue left after subtracting cost of goods sold (COGS), such as materials, inventory, and direct labor tied to delivering your product or service.
Gross Margin = (Revenue − COGS) ÷ Revenue × 100
Example: A business makes $50,000 in revenue and has $30,000 in COGS. Gross margin = ($50,000 − $30,000) ÷ $50,000 × 100 = 40%.
What is Net Margin?
Net margin is the percentage of revenue left after all expenses are paid, including COGS, rent, payroll, software, marketing, interest, and taxes.
Net Margin = Net Profit ÷ Revenue × 100
Example: A business makes $50,000 in revenue and ends with $6,000 net profit. Net margin = $6,000 ÷ $50,000 × 100 = 12%.
Key Differences
| Metric | What it includes | Best for |
|---|---|---|
| Gross Margin | Revenue and direct costs (COGS) | Pricing, product-level profitability, cost control |
| Net Margin | All expenses (operating, financing, taxes, etc.) | Overall profitability and business health |
When to Use Each Metric
- Use gross margin when evaluating pricing strategy or supplier cost changes.
- Use net margin when checking whether the business is truly profitable after all expenses.
- Use both together to find where profitability is leaking: direct costs or overhead.
Common Mistakes
- Comparing gross margin from one company to net margin from another.
- Assuming strong gross margin means strong net profit.
- Ignoring overhead and fixed costs when making pricing decisions.
- Tracking only yearly net margin instead of monthly trends.
FAQ
Is gross margin always higher than net margin?
In most cases, yes. Gross margin excludes many expenses that net margin includes.
Can gross margin improve while net margin gets worse?
Yes. That can happen when overhead costs rise faster than gross profit.
Should small businesses track both?
Yes. Gross margin helps improve pricing and delivery costs, while net margin shows total financial performance.