What is Gross Margin?

Calculating Gross Margin is a relatively simple process that involves subtracting the cost of goods sold (COGS) from revenue and then dividing the result by revenue. The formula can be expressed as follows: Gross Margin = (Revenue − Cost of Goods Sold) / Revenue

Revenue represents the total income generated from sales of goods or services.

COGS comprises the direct costs associated with producing those goods or delivering those services. These costs typically include materials, labor, and direct overhead expenses directly tied to the production process.

For example, if a startup generates $1,000,000 in revenue and incurs $600,000 in COGS, the Gross Margin would be calculated as follows:

Gross Margin = ($1,000,000 - $600,000) / $1,000,000 = 0.4

In this case, the Gross Margin would be 40%, indicating that for every dollar of revenue generated, the startup retains $0.40 after covering the direct costs of production.