Gross margin is a financial metric that measures a companys profitability by calculating the difference between revenue and cost of goods sold (COGS), divided by revenue. It is expressed as a percentage. Gross margin is a type of profit margin, specifically a form of profit divided by net revenue. It is used to determine the value of incremental sales and to guide pricing and promotion decisions. Gross margin can be expressed as a percentage or in total financial terms, and it can be reported on a per-unit basis or on a per-period basis for a business.

To calculate gross margin, you need to subtract the cost of goods sold from net sales and divide the result by net sales. The formula for gross margin is: Gross Margin = (Net Sales - COGS) / Net Sales. For example, if a company retains $0.35 from each dollar of revenue generated, this means its gross margin is 35% .

Gross margin is not the same as gross profit, which is the amount of money left over after you subtract direct costs and is expressed as a dollar amount. Gross profit can be calculated by subtracting the cost of goods sold from a companys revenue.

Gross margin is an important metric for businesses as it measures production and business efficiencies, and it can help with setting the selling price of a product and competitive analysis. Gross margins can identify potential problems before they hurt the bottom line. It is also a strong indicator of profitability.