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Gross margin is the difference between
revenue In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business. Commercial revenue may also be referred to as sales or as turnover. Some companies receive rev ...
and cost of goods sold (COGS), divided by revenue. Gross margin is expressed as a
percentage In mathematics, a percentage (from la, per centum, "by a hundred") is a number or ratio expressed as a fraction of 100. It is often denoted using the percent sign, "%", although the abbreviations "pct.", "pct" and sometimes "pc" are also u ...
. Generally, it is calculated as the selling price of an item, less the cost of goods sold (e. g. production or acquisition costs, not including indirect fixed costs like office expenses, rent, or administrative costs), then divided by the same selling price. "Gross margin" is often used interchangeably with "gross profit", however the terms are different: "gross ''profit''" is technically an absolute monetary amount and "gross ''margin''" is technically a percentage or ratio. Gross margin is a kind of
profit margin Profit margin is a measure of profitability. It is calculated by finding the profit as a percentage of the revenue. \text = = There are 3 types of profit margins: gross profit margin, operating profit margin and net profit margin. * Gross Pr ...
, specifically a form of profit divided by net revenue, e. g., gross (profit) margin, operating (profit) margin, net (profit) margin, etc.

# Purpose

The purpose of margins is "to determine the value of incremental sales, and to guide pricing and promotion decision."Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; David J. Reibstein (2010). ''Marketing Metrics: The Definitive Guide to Measuring Marketing Performance.'' Upper Saddle River, New Jersey: Pearson Education, Inc. . The
Marketing Accountability Standards Board (MASB) The Marketing Accountability Standards Board (MASB), authorized by the Marketing Accountability Foundation,MASB''Marketing Accountability Foundation (MAF)''. ited 8 December 2010/ref> is an independent, private sector, self-governing group of aca ...
endorses the definitions, purposes, and constructs of classes of measures that appear in ''Marketing Metrics'' as part of its ongoin
Common Language in Marketing Project
"Margin on sales represents a key factor behind many of the most fundamental business considerations, including budgets and forecasts. All managers should, and generally do, know their approximate business margins. Managers differ widely, however, in the assumptions they use in calculating margins and in the ways they analyze and communicate these important figures."

## Percentage margins and unit margins

Gross margin can be expressed as a percentage or in total financial terms. If the latter, it can be reported on a per-unit basis or on a per-period basis for a business. "Margin (on sales) is the difference between selling price and cost. This difference is typically expressed either as a percentage of selling price or on a per-unit basis. Managers need to know margins for almost all marketing decisions. Margins represent a key factor in pricing, return on marketing spending, earnings forecasts, and analyses of customer profitability." In a survey of nearly 200 senior marketing managers, 78 percent responded that they found the "margin %" metric very useful while 65 percent found "unit margin" very useful. "A fundamental variation in the way people talk about margins lies in the difference between percentage margins and unit margins on sales. The difference is easy to reconcile, and managers should be able to switch back and forth between the two."

## Definition of "Unit"

"Every business has its own notion of a 'unit,' ranging from a ton of margarine, to 64 ounces of cola, to a bucket of plaster. Many industries work with multiple units and calculate margin accordingly… Marketers must be prepared to shift between varying perspectives with little effort because decisions can be rounded in any of these perspectives." ''Investopedia'' defines "gross margin" as: In contrast, "gross profit" is defined as: or as the ratio of gross profit to revenue, usually as a percentage: $\text = \frac\times 100\%$ Cost of sales, also denominated "cost of goods sold" (COGS), includes variable costs and fixed costs directly related to the sale, e.g., material costs, labor, supplier profit, shipping-in costs (cost of transporting the product to the point of sale, as opposed to shipping-out costs which are not included in COGS), etc. It excludes indirect fixed costs, e.g., office expenses, rent, and administrative costs. Higher gross margins for a manufacturer indicate greater efficiency in turning raw materials into income. For a retailer it would be the difference between its markup and the wholesale price. Larger gross margins are generally considered ideal for most businesses, with the exception of discount
retailer Retail is the sale of goods and services to consumers, in contrast to wholesaling, which is sale to business or institutional customers. A retailer purchases goods in large quantities from manufacturers, directly or through a wholesaler, and ...

### Converting between gross margin and markup (gross profit)

Converting markup to gross margin $\text = \frac$ Examples: *Markup = 100% = 1 $\text = \frac = 0.5 = 50\%$ *Markup = 66.7% = 0.667 $\text = \frac = 0.4 = 40\%$ Converting gross margin to markup $\text = \frac$ Examples: *Gross margin = 50% = 0.5 $\text = \frac = 1 = 100\%$ *Gross margin = 40% = 0.4 $\text = \frac = 0.667 = 66.7\%$ Using gross margin to calculate selling price Given the cost of an item, one can compute the selling price required to achieve a specific gross margin. For example, if your product costs \$100 and the required gross margin is 40%, then $\text = \frac = \frac = \166.67$

### Gross margin tools to measure retail performance

Some of the tools that are useful in retail analysis are GMROII, GMROS and GMROL. * GMROII: Gross Margin Return On Inventory Investment * GMROS: Gross Margin Return On Space * GMROL: Gross Margin Return On Labor

### Differences between industries

In some industries, like clothing for example, profit margins are expected to be near the 40% mark, as the goods need to be bought from suppliers at a certain rate before they are resold. In other industries such as software product development the gross profit margin can be higher than 80% in many cases.http://smallbusiness.chron.com/net-profit-percentage-goals-business-23447.html - "Software companies had a 90 percent gross profit margin, as of 2011, according to FinanceScholar." In the agriculture industry, particularly the European Union, Standard Gross Margin is used to assess farm profitability.

# References

"Relationship between Markup and Gross Margin"
{{authority control Accounting terminology Corporate finance Financial ratios Management accounting Profit