What does Gross Margin mean?

Gross margin shows how much (or little) of your revenue is eaten up by the direct costs of what you sell.

How it's calculated

This metric subtracts your direct costs from your revenue to determine your gross margin (sometimes called “gross income”) and then divides the result by your revenue to produce a percentage.

What's better?

Higher

What it means

Gross margin shows how much (or little) of your revenue is eaten up by the direct costs of what you sell. A grocery store, for example, has to buy all of its goods from others. Its gross margin is small. An accounting firm, on the other hand, sells hours of consulting time and has little or no direct costs. Its gross margin is high, which means it has a lot more flexibility in spending on other expenses. The grocery store needs to be much more careful with spending to protect its profit margin.

The benchmark comparison should give you a good sense of how your costs compare to those of your competitors. If your gross margin is below the industry standard, you may want to shop around for better prices on raw materials or find other ways to reduce your direct costs.

(Source: LivePlan.com)