Gross margin is the share of revenue left after paying only the direct cost of producing what a company sells — raw materials, factory labor, hosting bills. The formula is (revenue − cost of goods sold) ÷ revenue. Sell $100 of product that cost $40 to make, and gross margin is 60%.
Gross margin is the first and widest of three profitability layers. Below it comes operating margin (which also subtracts running costs like salaries, marketing, and R&D), and below that net margin (which subtracts everything left, including interest and taxes). Gross margin isolates one thing: how profitable the core product is before the cost of running the wider business.
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A high, stable gross margin usually signals a product customers will pay up for — branded software, premium goods — while a thin one points to a commodity business competing on price. Because it sits at the top of the income statement, a falling gross margin is an early warning that rising costs or discounting are eating into the product itself, often before it reaches the bottom line.
Gross margin subtracts only the direct cost of making the product; net margin subtracts everything, including running costs, interest, and taxes. Gross is the widest and net the narrowest layer.
It's structural to the industry — software and branded goods can run 60–90%, while grocers and hardware makers run much lower and are still healthy. Compare against sector peers and the company's trend.
It sits at the top of the income statement, so a shrinking gross margin is an early sign that rising input costs or discounting are eating into the core product — often before it reaches profit.
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Educational research only — not investment advice.