Gross profit margin: formula, example and how to improve

Published Friday 17 April 2026

Table of contents

• What is gross profit margin?
• Gross profit margin vs gross profit
• How to calculate gross profit margin
• Calculate accurately
• What is a good gross profit margin?
• Analysing gross profit margin for business insights
• How to improve gross profit margin
• FAQs on gross profit margin

Key takeaways

• Calculate your gross profit margin by subtracting your cost of goods sold from your revenue, then dividing that figure by your total revenue and multiplying by 100 — this tells you what percentage of every dollar earned you keep after direct costs.
• Benchmark your gross profit margin against businesses of a similar size in your industry, as a healthy margin varies widely — professional services may exceed 55%, while grocery retail often falls below 45%.
• Review your gross profit margin monthly to catch declining trends early, so you can act on rising supplier costs or pricing pressure before they seriously affect your bottom line.
• Improve your gross profit margin by raising prices based on the value you deliver and negotiating with suppliers to lower your cost of goods sold — most businesses benefit from using both strategies together.

Key takeaways

• Calculate gross profit margin using the formula (Gross Profit ÷ Revenue) × 100. Gross profit equals revenue minus cost of goods sold. This measures what percentage of sales revenue remains after covering direct costs.
• Include all direct costs in COGS, match revenue and costs to the same time period, exclude operating expenses from COGS, and use precise figures before converting to percentages.
• Benchmark your gross profit margin against industry standards. Acceptable margins vary significantly by industry and business model.
• Improve your gross profit margin by strategically adjusting prices based on market conditions and value delivered. You can also reduce cost of goods sold through supplier negotiations and streamline operations to eliminate waste.

What is gross profit margin?

Gross profit margin is the percentage of sales revenue your business keeps after paying for the direct costs of goods or services sold. Calculating these inventory costs can vary. There are special rules for retailers with a turnover of $1 million or less. It shows how efficiently you turn sales into profit before covering operating expenses like rent, wages, and marketing.

Understanding why gross profit margin matters helps you make better business decisions. Here's how it benefits your business:

• Cash flow visibility: reveals how much revenue you retain to cover operating expenses
• Efficiency measurement: shows how well you control production and service delivery costs
• Business health indicator: identifies profitable areas and potential problem spots
• Growth planning: provides more resources for expansion and investment when margins are higher

Higher gross profit margins give you more capacity to cover essential expenses like rent and utilities, improving your chances of achieving net profitability.

Gross profit margin vs gross profit

Gross profit is a dollar amount, while gross profit margin is a percentage. Both measure what remains after direct costs, but they present the information differently. Gross margin is another term for gross profit margin.

Understanding the difference helps you analyse your business performance more effectively. Here's how they differ:

• Gross profit: the dollar amount remaining after subtracting direct costs (for example, $50,000)
• Gross profit margin: the percentage of revenue retained after direct costs (for example, 60%)

How to calculate gross profit margin

Gross profit margin formula

Use this formula to calculate your gross profit margin:

Gross Profit Margin = (Gross Profit ÷ Revenue) × 100

Where:

• Gross Profit = Revenue minus Cost of Goods Sold (COGS)
• Revenue = total sales income
• Result = percentage showing profit efficiency

Calculating gross profit margin step by step

Now that you know the formula, here's how to apply it. Follow these two steps to calculate your gross profit margin:

1. Calculate your gross profit: take your total revenue (sales income) and subtract your cost of goods sold (COGS). The result is your gross profit in dollars.
2. Calculate your gross profit margin: divide your gross profit by your total revenue, then multiply by 100. The result is your gross profit margin percentage.

Gross profit margin example calculation

Here's a worked example:

If your cleaning business earns $20,000 in revenue and it costs $8,000 to provide those services:

• Gross profit: $20,000 - $8,000 = $12,000
• Gross profit margin: ($12,000 ÷ $20,000) × 100 = 60%

Your gross profit margin is 60%, meaning you keep 60 cents of every dollar earned after direct costs.

Calculate accurately

Calculation errors can lead to poor business decisions. Follow these practices for accurate calculations:

• Include all COGS: add all direct costs like materials, labour, and production expenses
• Match timeframes: align your revenue and COGS to the same period
• Separate expenses: exclude operating expenses (rent, marketing) from COGS calculations
• Use precise figures: avoid rounding until you convert to percentages

Accurate COGS calculation is critical to properly value your inventory. Eligible businesses can simplify this by using the same closing value of trading stock as their opening value if sales are under $1.3 million. Even small errors can significantly affect your margin analysis and business decisions.

What is a good gross profit margin?

A good gross profit margin for most small businesses falls between 50% and 70%. However, what counts as "good" varies by industry and business model.

Your margin must cover operating expenses, taxes, and leave reasonable profit after all direct costs are paid.

Industry benchmarks for gross profit margin

Different industries have different typical gross profit margins based on their cost structures and competitive environments. Here are some industry benchmark examples:

Higher margin industries (55%+):

• jewellery and luxury goods
• cosmetics and personal care
• software and digital services
• professional services

Lower margin industries (below 45%):

• electronics retail
• alcoholic beverages
• grocery and food retail
• manufacturing with high material costs

Higher margins typically occur in industries with strong pricing power, low material costs, or premium positioning. Lower margins are common where competition is fierce or material costs are high.

Your accountant or bookkeeper can help you find gross profit margin benchmarks for small to medium-sized businesses (SMBs) in your industry and clarify what your business should aim for.

Benchmarking your gross profit margin

Compare your gross profit margin with similar-sized businesses in your industry, market, or region. This gives you the clearest picture of how your performance stacks up against direct competitors rather than unrelated industries.

When to reassess your gross profit margin

Review your gross profit margin when market conditions change, such as rising supplier costs or shifts in customer demand. Regular monitoring helps you spot problems early and identify opportunities for growth.

Your accountant can help you determine the right target for your business.

Analysing gross profit margin for business insights

Analysing your gross profit margin reveals which products, services, or customer segments generate the most profit. Use these insights to set competitive prices that attract sales and manage costs to protect your margins.

Interpreting gross profit margin trends

Track your gross margin trends over time to spot patterns in your business performance. Here are the key patterns to look for:

• which products or services generate the highest margins
• how your costs change throughout the year
• whether margins are improving, declining, or staying flat

Spotting a declining trend early gives you the opportunity to address rising costs or pricing pressure before they affect your bottom line. An improving trend suggests your efficiency or pricing strategies are working.

Factors affecting gross profit margin

Your gross profit margin doesn't exist in isolation. External factors can affect your gross profit margin:

• Changes in demand: understanding demand shifts helps you adjust pricing strategies to maintain margins while staying competitive
• Rising supplier costs: monitoring material and labour costs helps you adjust pricing or find efficiencies to protect your margins
• Customer spending shifts: staying aware of customer spending patterns helps you adapt your offerings and pricing to maintain revenue

How to improve gross profit margin

You can improve your gross profit margin in two main ways: increase your prices or reduce your cost of goods sold. Most businesses use a combination of both strategies.

Adjust your prices

Raising your prices can improve your margins if customers see the value. Several pricing strategies can help you increase margins while maintaining customer loyalty. Consider these pricing strategies:

• Market-based pricing: monitor competitor prices and adjust strategically
• Value-added pricing: enhance products or services to justify premium pricing
• Regular price reviews: assess pricing quarterly to reflect cost changes
• Customer communication: explain price increases by highlighting added value

Reduce cost of goods sold

Lowering your COGS directly improves your gross profit margin. Focus on supplier negotiations, waste reduction, and process improvements to reduce costs without compromising quality.

FAQs on gross profit margin

Here are answers to common questions about gross profit margin.

What's the difference between gross profit margin and net profit margin?

Gross profit margin measures profit after direct costs (COGS), while net profit margin includes all expenses (operating costs, taxes, interest). Gross profit margin is always higher than net profit margin because it excludes operating expenses.

Can a business survive with a low gross profit margin?

Yes, some businesses operate successfully with low gross profit margins by achieving high sales volumes. However, you need careful cost control and efficient operations to remain profitable.

How often should I calculate gross profit margin?

Calculate your gross profit margin monthly to track trends and spot issues early. Review it quarterly alongside other financial metrics for comprehensive business analysis.

What if my gross profit margin is negative?

A negative gross profit margin means your direct costs exceed your revenue. This signals serious pricing or cost problems that need immediate attention. Review your pricing strategy and reduce COGS urgently.