Gross profit margin: formula and ways to improve it

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
• What is a good gross profit margin?
• Analysing gross profit margin for business insights
• Gross profit margin compared with other metrics
• FAQs on gross profit margin

Key takeaways

• Calculate your gross profit margin by subtracting your cost of goods sold from revenue, then dividing that figure by revenue and multiplying by 100 to get a percentage you can track and compare over time.
• Benchmark your margin against businesses in your industry, as service businesses typically achieve 50–80% while retail businesses often operate at 20–50%, so what counts as healthy varies widely.
• Review your margin monthly to catch problems early, such as rising supplier costs or pricing issues, before they significantly affect your business performance.
• Improve a low margin by raising prices, negotiating better deals with suppliers, or reducing the direct costs involved in delivering your product or service.

Key takeaways

• Calculate your margin: Divide gross profit by revenue and multiply by 100 to get a percentage
• Track trends over time: Compare monthly margins to spot problems early
• Benchmark against your industry: Service businesses typically achieve 50–80%, retail 20–50%
• Improve through three levers: Adjust pricing, reduce COGS, or streamline operations

What is gross profit margin?

Gross profit margin is the percentage of sales revenue that remains after subtracting your cost of goods sold (COGS). It reveals how efficiently your business converts sales into profit before accounting for operating expenses like rent, utilities and staff salaries.

Higher margins give you more financial flexibility to cover expenses, invest in growth and weather unexpected costs.

Gross profit margin vs gross profit

Gross profit is a pound amount, while gross profit margin is a percentage. Here's the difference:

• Gross profit: An absolute pound amount, such as £12,000
• Gross profit margin: A percentage of total revenue, such as 60%

Gross margin is another term for gross profit margin, which is the most commonly used business ratio in HM Revenue and Customs (HMRC).

How to calculate gross profit margin

Gross profit margin (calculation)

Use this formula to calculate what percentage of your sales revenue you keep after paying for the goods or services you sell:

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

• Gross Profit: Revenue minus cost of goods sold (COGS)
• Revenue: Total sales income
• Result: Percentage showing profit efficiency

Gross profit margin formula explained

Follow these three steps to calculate your gross profit margin:

1. Subtract your COGS from revenue: This gives you your gross profit in pounds
2. Divide gross profit by revenue: Then multiply by 100 to get a percentage
3. Compare your result: A higher percentage means you keep more of each sale

Gross profit margin example calculation

Here's an example using a cleaning business:

• Revenue: £20,000 from cleaning offices
• COGS: £8,000 in direct costs to provide those services
• Gross profit: £20,000 - £8,000 = £12,000
• Gross profit margin: (£12,000 ÷ £20,000) × 100 = 60%

This means the business keeps 60p of every pound earned before paying operating expenses.

Avoid common calculation mistakes

Accurate calculations depend on including the right costs and matching your time periods. Watch out for these common errors:

• Include all direct costs: Add materials, labour and shipping to your COGS
• Exclude operating costs: Keep rent, marketing and admin out of COGS
• Match your time periods: Ensure revenue and COGS cover the same dates
• Calculate precisely: Use exact figures before rounding the final percentage
• Check your totals: Missing £2,000 from £200,000 in sales changes your margin by 1%, as such omissions show a difference in the rate of gross profit.

What is a good gross profit margin?

A good gross profit margin depends on your industry and business model. Most businesses aim for 20–80%, with service businesses typically at the higher end and retail at the lower end.

Your margin needs to be high enough to:

• cover operating expenses: rent, utilities, salaries and marketing
• fund growth: equipment, technology and expansion
• build a buffer: protection against unexpected costs
• allow pricing flexibility: room to adjust prices when needed

Factors affecting your margins

Several factors determine what counts as a good margin 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 brick-and-mortar retailers
• market competition: highly competitive markets force lower margins to stay price-competitive
• geographic location: urban businesses face higher operating costs, requiring stronger margins

Benchmarking your gross profit margin

Understanding where your margin stands relative to competitors helps you identify opportunities for improvement. Compare your margin against similar-sized businesses in your industry and region. This gives you a realistic picture of how your business is performing relative to competitors.

Industry benchmarks for gross profit margin

Industry benchmarks vary widely:

• higher margins (over 55%): jewellery, cosmetics, software
• lower margins (below 45%): electronics, alcoholic beverages, grocery

Your accountant or bookkeeper can help you find benchmarks specific to your industry and business size.

When to reassess your gross profit margin

Regular margin reviews help you respond quickly to changing business conditions. Reassess your gross profit margin when:

• supplier costs change: rising material or labour costs squeeze your margins
• market conditions shift: economic changes affect what customers will pay
• you miss growth targets: declining margins may explain underperformance
• you're planning major decisions: pricing changes, new products or expansion

Your accountant can help you set margin targets, and accounting software like Xero makes it easy to track your performance over time.

Analysing gross profit margin for business insights

Gross profit margin analysis reveals which products or services generate the strongest returns and where you need to make changes.

Your margin can tell you:

• which offerings are most profitable: compare margins across products or services
• whether your pricing works: assess if prices support healthy margins
• where costs are too high: spot expenses that erode your profits
• how you compare to competitors: benchmark your efficiency against industry standards

Interpreting gross profit margin trends

Track your gross margin over time to spot patterns in your business performance. You might notice seasonal dips, see which products consistently underperform, or catch rising supplier costs before they hurt your profits.

Gross profit margin compared with other metrics

Gross profit margin is one of several profitability metrics. Here's how it compares to operating profit margin and net profit margin.

Gross profit margin vs operating profit margin

Operating profit margin measures what's left after paying both COGS and operating expenses like rent, utilities and salaries. It shows how efficiently you run your day-to-day operations, not just how well you price your products.

Gross profit margin vs net profit margin

Net profit margin shows what remains after all expenses, including taxes and interest. It's your true bottom-line profitability. While gross profit margin focuses on product or service efficiency, net profit margin reveals your overall business health.

FAQs on gross profit margin

Here are answers to common questions about calculating and using gross profit margin.

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

Gross profit is the pound amount left after subtracting COGS from revenue. Gross profit margin expresses this as a percentage of revenue, making it easier to compare performance across time periods or against other businesses.

What's a healthy gross profit margin?

A healthy margin depends on your industry. Service businesses typically achieve 50–80%, while retail businesses often operate at 20–50%. Compare your margin to industry benchmarks and ensure it's high enough to cover your operating expenses and fund growth.

How often should I calculate my gross profit margin?

Calculate your margin monthly to spot trends early. Regular tracking helps you identify problems like rising costs or pricing issues before they significantly impact your business.

Can a gross profit margin be too high?

Very high margins might signal overpricing that could hurt sales volume or attract new competitors. Balance margin targets with market positioning and growth goals.

How can I improve my gross profit margin?

You can improve your margin by raising prices, reducing COGS through better supplier negotiations or bulk purchasing, or improving operational efficiency to deliver products or services at lower cost.