How to Analyze and Optimize Your Gross Margin

One of the most infallible measures of your company’s profitability is its gross margin. Calculating and analyzing your gross margin can give you clearer insights into how well your business is performing. It’s a vital metric to constantly keep an eye on and try to improve to drive greater profits and business success.

In the following guide, you’ll learn more about your gross margin, its significance, and how it relates to your other business metrics.

What Is Gross Margin?

Your company’s gross margin indicates the difference between its revenue and the cost of goods sold (COGS). The latter includes the direct production costs and any indirect costs associated with product creation. Sometimes called “gross profit margin,” it is a metric that aids businesses in evaluating their operational efficiency and financial strategies.

However, there is a distinction between gross profit and gross profit margins. Gross profit simply refers to the absolute amount a company earns after deducting its COGS. Gross profit margin, in contrast, reflects the percentage of revenue that exceeds the COGS. Therefore, gross profit is measured in dollars and gross profit margins are expressed as percentages (and are, as such, also referred to as “gross margin percentages”).