Gross margin is the difference between revenue and cost of goods sold (COGS), expressed either as an absolute amount or as a percentage of revenue. As a percentage, gross margin indicates what proportion of each unit of revenue is retained after deducting direct production or service delivery costs, before operating expenses such as sales, marketing, and general administration. Gross margin is a fundamental measure of pricing power, production efficiency, and the inherent profitability of a business’s products or services.
Why This Matters
Gross margin is one of the most widely used indicators of a business’s financial health because it isolates the core economics of delivering a product or service from the broader cost structure of running the organisation. Changes in gross margin often signal important shifts in competitive dynamics, cost structure, or pricing strategy before they become visible in net profit. Monitoring gross margin trends by product line, customer segment, or geography reveals where the business generates the most direct value.
Where This Fits
This term sits within the Performance Analysis area of Performance & Control.
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