Gross margin

Gross margin measures how much sales revenue remains after the cost of goods sold. As a percentage, it is gross profit divided by revenue: selling a £10-cost item for £15 produces a margin of about 33.3%, not 50%.

Gross margin percentage is (sales revenue − cost of goods sold) ÷ sales revenue × 100. Net sales should reflect relevant discounts and returns, and revenue and costs should use comparable periods and tax treatment. The measure leaves operating expenses outside the calculation, so it cannot be read as the final profitability of a business.

For example, sales of £1,000 with £600 cost of goods sold generate £400 gross profit and a 40% gross margin. Markup instead compares the price difference with cost. Confusing the two can lead a retailer to set prices that deliver a lower margin than intended.