gross margin
Gross margin is the percentage of revenue left after subtracting direct costs like materials, labor, or production—before overhead.
Gross margin shows how much of every dollar in revenue a company keeps after covering the direct costs of producing its product or service. It’s expressed as a percentage, and it reveals the strength of your pricing, production efficiency, and cost structure.
Unlike net profit, which includes all expenses, this metric focuses only on top-line profitability. It’s a litmus test for how scalable and sustainable your model is. High gross margins usually signal pricing power, operational efficiency, or differentiated value. Low margins mean trouble scaling—because growth eats into returns.
Where gross margin drives strategy
A SaaS business keeps 80 cents of every dollar after covering direct costs like hosting and support. That remaining value fuels R&D, sales, and expansion. It signals a model built for scale.
In contrast, a DTC brand retains only 35 cents. Rising shipping and production costs squeeze contribution. Leadership responds by renegotiating with suppliers, adjusting pricing, and discontinuing unprofitable SKUs. They’re not just chasing top-line growth—they’re protecting the efficiency that funds everything else.
What people get wrong about gross margin
Some confuse revenue growth with business health. But if margins shrink as revenue grows, the model breaks under scale. Others lump in operating expenses, distorting the number’s purpose. Gross margin isolates direct costs only—everything else lives further down the P&L.
Another mistake: ignoring margin by product or segment. Blended margins hide where value is created—or destroyed. Great operators track gross margin by SKU, channel, and geography to understand where profit really comes from.
Revenue is vanity—margin is truth
Gross margin tells you whether your business earns the right to grow. It filters out noise and shows the real efficiency of your offer. Revenue may open the door, but margin keeps the lights on. And when you know where it stands, you can scale with confidence—not just ambition.
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