Gross profit margin formula: How to calculate and boost profits for your small business
Learn the gross profit margin formula to price right, cut costs, and grow your profit.
Written by Lena Hanna—Trusted CPA Guidance on Accounting and Tax. Read Lena's full bio
Published Wednesday 26 November 2025
Table of contents
Key takeaways
• Calculate gross profit margin by dividing gross profit (revenue minus cost of goods sold) by total revenue and multiplying by 100 to get a percentage that shows how efficiently your business converts sales into profit.
• Monitor your gross profit margin trends over time and benchmark against industry standards to identify which products or services generate the strongest returns and where improvements are needed.
• Improve your gross profit margin through strategic price optimization based on market conditions and customer value, negotiating better supplier rates, and streamlining operations to reduce waste and automate processes.
• Ensure accurate calculation by including all direct costs in your cost of goods sold while excluding operating expenses like rent and marketing, and maintain consistent time periods for revenue and cost data to avoid distorted margin analysis.
What is gross profit margin?
While accounting standards don't formally define it, UK company law presents gross profit as the result of turnover, less [cost of sales. From this, we derive the gross profit margin: the percentage of sales revenue that remains after subtracting your cost of goods sold (COGS). This metric reveals how efficiently your business converts sales into profit before accounting for operating expenses.
After you pay for operating expenses like rent, office supplies and loan interest, the remainder is your net profit.
Your gross profit margin shows how much of each pound you keep to cover business expenses like rent, utilities and staff salaries. Higher margins give you more financial flexibility to invest in growth and weather unexpected costs.
Higher gross profit margins make it easier to cover expenses and increase your chances of making a net profit.
Gross profit margin vs gross profit
Gross profit and gross profit margin differ in how you express the numbers:
- Gross profit: An absolute pound amount (e.g., £12,000)
- Gross profit margin: A percentage of total revenue (e.g., 60%)
Gross margin is another term for gross profit margin – both refer to the same percentage-based profitability measure.
How to calculate gross profit margin
Gross profit margin (calculation)
Gross profit margin formula:
Gross Profit Margin = (Gross Profit ÷ Revenue) × 100
- Gross Profit = Revenue - Cost of Goods Sold (COGS)
- Revenue = Total sales income
- Result = Percentage showing profit efficiency
Gross profit margin formula explained
Step-by-step calculation process:
- Calculate gross profit: Revenue - Cost of Goods Sold = Gross Profit
- Apply the formula: (Gross Profit ÷ Revenue) × 100 = Gross Profit Margin %
- Interpret the result: Higher percentages indicate more efficient profit generation
Gross profit margin example calculation
Let's say your business makes £20,000 by cleaning offices. It costs you £8,000 to provide those services. Your gross profit is £12,000.
Your gross profit margin is therefore 60%.
Avoid common calculation mistakes
Common calculation mistakes to avoid:
- Incomplete COGS: Include all direct costs like materials, labour, and shipping
- Mixed expenses: Don't include operating costs like rent or marketing in COGS
- Inconsistent periods: Ensure revenue and COGS cover the same time frame
- Rounding errors: Use precise figures before rounding the final percentage
Accurate calculation of cost of goods sold (COGS) is critical, as even small errors can significantly distort your margin analysis. For example, HMRC guidance shows that missing £2,000 from £200,000 in sales can change your gross profit margin by 1%.
Analysing gross profit margin for business insights
Gross profit margin analysis reveals which parts of your business generate the strongest returns and where improvements are needed.
Key business insights from margin analysis:
- Product profitability: Identify your most and least profitable offerings
- Pricing effectiveness: Assess whether your prices support healthy margins
- Cost efficiency: Spot areas where expenses are eroding profits
- Competitive positioning: Compare your efficiency against industry standards
Interpreting gross profit margin trends
Monitor your gross margin trends over time to reveal patterns in your business's performance – such as where your revenue is strong (and where it isn't), and how your costs change by product and time of year.
Factors affecting gross profit margin
External factors can affect your gross profit margin:
- Changes in demand – this affects the prices you can charge. If demand falls, for example, you might have to lower prices to entice customers
- Rising supplier (input) costs – when costs rise (such as for materials and labour), your profit margins will narrow
Customers might also have less to spend as their own daily costs have gone up, potentially affecting your revenue.
What is a good gross profit margin?
What constitutes a good gross profit margin varies significantly by industry, but generally ranges from 20% to 80% depending on your business model.
Your margin must be sufficient to:
- Cover operating expenses: Rent, utilities, salaries, marketing
- Support growth investments: Equipment, technology, expansion
- Provide profit buffer: Protection against unexpected costs
- Enable competitive pricing: Flexibility to adjust prices when needed
Factors affecting your margins
Factors that determine good margins for your business:
Industry type: Service businesses typically achieve 50-80% margins, while retail often operates at 20-50%
Business model: E-commerce stores generally maintain higher margins than traditional brick-and-mortar retailers
Market competition: Highly competitive markets like electronics force lower margins to remain price-competitive
Geographic location: Urban businesses face higher operating costs, requiring stronger margins to maintain profitability
Benchmarking your gross profit margin
For a realistic picture of how your business is performing within your industry, benchmark your business against competitors in your industry.
You'll get the clearest picture of your gross profit margin if you benchmark it against similar-sized businesses that operate in the same industry, market or region.
Industry benchmarks for gross profit margin
Gross profit margins can vary significantly in different sectors. For example, jewellery and cosmetics industries often achieve margins over 55%. Industries like electronics and alcoholic beverages often have margins below 45%. These differences reflect the unique environments of each industry.
Your accountant or bookkeeper can help find gross profit margin benchmarks for small and medium-sized businesses (SMBs) in your industry and clarify what your business should aim for. This specialist insight matters. Official guidance notes that even experienced enquiry officers are rarely accepted as experts on the trading patterns of a particular business.
When to reassess your gross profit margin
Evaluating and monitoring your gross profit margins is especially important in a changing market (when your costs might rise). It's also good to look at them when conducting a financial performance analysis – for example, if you've missed your growth targets.
Your gross profit margin needs to cover the costs of selling your products or services (cost of goods sold) and other costs like operating expenses and taxes. Your accountant can help you pinpoint a gross margin for your business.
You can use Xero accounting software to run financial reports and easily gauge your business's performance.
Gross profit margin compared with other metrics
Here's a quick comparison of the main differences between gross profit margin and two other business metrics, and how to use each one to work out the profitability of your business.
Gross profit margin vs operating profit margin
While gross profit margins only consider the cost of goods sold (COGS), operating profit margins are the next step in analyzing revenue vs profit, as they also account for other operational costs like rent and utilities.
Gross profit margin vs net profit margin
Net profit margin goes a step further than the operating profit margin. Net profit margin shows a business's overall financial health, after taking into account your operating cost, as well as the deduction for interest and taxes. It's the 'bottom line' profit.
How to use each metric
Use your:
- Gross profit margins to analyse your COGs and to make pricing and resource allocation decisions
- Operating profit margins together with your gross profit margins to determine your pricing, resource allocation and budgeting work
- Net profit margins for long-term financial planning as businesses with consistently high net profit margins are more resilient to economic changes
How to improve gross profit margin
Improving your gross profit margin requires strategic focus on pricing, costs, and operational efficiency. Here are proven methods to strengthen your margins:
Price optimization strategies:
- Regular price reviews: Adjust pricing based on market conditions and cost changes
- Value-based pricing: Price according to customer value, not just cost-plus models
- Premium positioning: Enhance products or services to justify higher prices
Cost reduction approaches:
- Supplier negotiations: Secure better rates through bulk purchasing or long-term contracts
- Process improvements: Eliminate waste and streamline production workflows
- Technology adoption: Automate repetitive tasks to reduce labour costs
Adjust your prices
You may need to update your prices as market conditions change. If a competitor lowers their price, you may need to adjust your prices to maintain sales. Improve your products or services to support higher pricing and better margins.
Reduce your cost of goods sold
Monitor your costs closely, as they affect your gross profit margin. Find affordable suppliers and build strong relationships – you may get bulk discounts and better rates, which can lower your long-term costs.
Streamline your operations
Reduce waste and automate your processes – for example, by using accounting software – to cut costs and boost profit margins. Effective inventory management can reduce excess stock and lower storage costs.
Track your gross profit margin with confidence
You can stay on top of your gross profit margin with the right tools. Xero accounting software automates calculations and provides real-time reports, so you can make confident decisions and focus on growing your business. See how you can track your financial health with ease.
FAQs on gross profit margin
Below are answers to common questions about gross profit margin.
What is a 30% gross profit margin?
A 30% gross profit margin means that for every £100 of revenue you generate, you have £30 left after paying for the cost of goods sold. This remaining amount is your gross profit, which you can then use to cover your other operating expenses like rent, marketing, and salaries.
How do you calculate gross profit margin in the UK?
The formula for calculating gross profit margin is the same in the UK as it is globally. You calculate your gross profit (revenue minus cost of goods sold), then divide that by your total revenue. To express it as a percentage, multiply the result by 100. For example, if your revenue is £50,000 and your cost of goods sold is £20,000, your gross profit is £30,000. Your gross profit margin is (£30,000 / £50,000) x 100, which equals 60%.
What is the difference between gross profit and gross profit margin?
Gross profit is an absolute monetary value – it's the total revenue minus the cost of goods sold (for example, £10,000). Gross profit margin, on the other hand, is a percentage that shows the relationship between gross profit and revenue. It tells you how profitable your sales are, making it a useful metric for comparing performance over time or against other businesses.
Disclaimer
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.