What is Gross Margin?

Gross margin is a profitability metric that expresses the difference between revenue and cost of goods sold (COGS) as a percentage of revenue. It is calculated using the formula: Gross Margin = ((Revenue – COGS) / Revenue) × 100. For example, if a business generates $200,000 in revenue and its COGS is $120,000, the gross margin is 40 percent. This means the company retains $0.40 from every dollar of revenue to cover operating expenses, debt service, taxes, and profit. Gross margin is one of the most widely used financial metrics in commerce because it measures the fundamental efficiency of a business’s core operations—how effectively it converts raw materials or purchased goods into revenue.

Why It Matters

Gross margin is the first profitability checkpoint on the path from revenue to net income. A business with strong top-line revenue but thin gross margins has very little room to absorb operating expenses, and even modest cost increases or pricing pressures can push it into unprofitability. Conversely, a business with healthy gross margins has a financial cushion that enables it to invest in growth, weather market downturns, and compete more aggressively on customer acquisition and retention.

For e-commerce and multichannel retailers, gross margin varies significantly by product, channel, and customer segment. A product sold on a brand’s direct-to-consumer website typically carries a higher gross margin than the same product sold through a marketplace like Amazon, where referral fees, FBA costs, and advertising expenses erode the margin. Understanding these channel-level differences is critical for making informed decisions about where to invest marketing dollars, which channels to prioritize, and how to structure pricing across platforms.

Gross margin analysis also reveals the health of your supply chain and purchasing strategy. Declining gross margins over time may signal rising supplier costs, unfavorable currency movements, increasing freight expenses, or an over-reliance on discounting to move inventory. By monitoring gross margin trends at the SKU and category level, operations teams can identify problems early and take corrective action—whether that means renegotiating supplier contracts, adjusting retail prices, rationalizing underperforming product lines, or finding more cost-effective logistics solutions.

How It Works

Gross margin analysis operates at multiple levels of granularity, and each level provides distinct strategic insights:

• Company-level gross margin: The aggregate gross margin across all products, channels, and transactions. This is the figure that appears on the income statement and is the primary benchmark used by investors, lenders, and analysts to evaluate overall business health. Industry benchmarks vary—apparel retailers typically operate at 50–60 percent gross margins, while grocery and consumer electronics businesses may operate at 20–30 percent.
• Product-level gross margin: Calculating gross margin for individual SKUs or product categories reveals which products are truly driving profitability and which are dragging it down. A product with high sales volume but razor-thin margins may contribute less gross profit in absolute dollars than a lower-volume product with a much higher margin. SKU-level margin analysis informs assortment planning, promotional strategy, and discontinuation decisions.
• Channel-level gross margin: Each sales channel imposes its own cost structure—marketplace commissions, payment processing fees, channel-specific advertising, and fulfillment cost differences. Calculating gross margin by channel tells you where your most profitable sales are happening and whether certain channels are actually destroying value when all costs are considered.
• Order-level gross margin: Analyzing margin at the individual order level accounts for discounts applied, shipping subsidies offered, and the specific mix of products purchased. Orders with heavy discounts or free shipping on low-value items may have negative gross margins, meaning the business loses money on every such transaction. Identifying these patterns enables targeted corrections.
• Gross margin vs. contribution margin: While gross margin considers only COGS, contribution margin goes further by subtracting variable costs like marketplace fees, payment processing, and variable fulfillment costs. Both metrics are valuable, but contribution margin gives a more complete picture of the incremental profitability of each sale.

How Nventory Helps

Nventory delivers real-time gross margin visibility at every level—from individual orders and SKUs up to channels and the entire business. By unifying cost data from purchase orders, landed cost calculations, and supplier records with revenue data from all your connected sales channels, Nventory computes accurate gross margins automatically, without manual spreadsheet consolidation. Built-in dashboards highlight margin trends, flag products or channels where margins are eroding, and surface opportunities to improve profitability. With Nventory’s AI-powered analytics, you can simulate the margin impact of price changes, supplier switches, and channel mix shifts before committing to them—giving you the confidence to make data-driven decisions that protect and grow your bottom line.