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Join early accessGross margin
Profit left after the cost of goods, as a percentage of revenue.
Gross margin is revenue minus cost of goods sold (COGS), divided by revenue. It sets the ceiling on your profitability — everything else (ads, fees, overhead) comes out of it. A high gross margin gives you room to spend on growth; a thin one doesn't.
In practice
Gross margin is the first honest read on whether a product is worth selling at all. Before advertising, before overheads, before any growth plan — if there isn't enough room between what you pay and what you charge, no amount of marketing efficiency downstream will rescue it. It's also the number that sets your ceiling: you can't build a 40% contribution margin on a product with a 25% gross margin.
Its blind spot is everything that happens after the product cost. Two products with identical gross margins can behave completely differently once one of them is bulky to ship, sells through a marketplace that takes 15%, or comes back one time in eight. Gross margin is the right starting screen and the wrong basis for setting ad targets — that's contribution margin's job.
Formula
Gross margin = (Revenue − COGS) ÷ Revenue × 100
Example: $100 revenue − $60 COGS = $40 (40% gross margin).
What a good result depends on
Varies by category; the key is enough headroom to fund ads and overhead.
Common mistakes
- Confusing margin with markup — a 67% markup is a 40% margin.
- Judging overall health on gross margin alone.
Questions people ask
- What counts as cost of goods sold?
- The direct cost of the product itself: what you paid your supplier, plus inbound freight and duties to get it into your warehouse. Fulfilment, advertising and overheads aren't COGS.
- What's a good gross margin for e-commerce?
- It varies enormously by category — electronics resale runs thin, own-brand goods run fat. The more useful test is whether it leaves enough contribution to fund customer acquisition at your realistic CPA.
- Why is my gross margin healthy but my profit isn't?
- Because the costs that eat it come after COGS: fees, shipping, returns, discounts and ad spend. Work down to contribution margin and then net profit — the leak is almost always in that gap.