gross margin

Gross Margin

What's left from revenue after subtracting the direct costs of producing what you sold, shown as a percentage.

When you'd see it: Investor pitches, board decks, earnings calls. "We're a 70% gross margin business" is shorthand for healthy software economics; "gross margin compressed to 38%" is finance-speak for the cost of goods got more expensive faster than prices did.

Why it matters: Gross margin tells you how much money each dollar of sales has left over to cover everything else — salaries, marketing, rent, profit. Software businesses typically run 70-90%; restaurants run 5-15%. The number sets a ceiling on how much a business can afford to spend on everything that isn't building the product.

Common mistakes: Confusing gross margin with profit margin. Gross margin only subtracts direct costs (COGS); net margin subtracts everything. A 70% gross margin business can still lose money if it spends 80% of revenue on marketing and salaries.

Related COGS, P&L