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What is gross margin

Also known as: gross profit margin, gross margin percentage, how to calculate gross margin

Definition

Gross margin is the share of revenue left after the cost of goods sold: (revenue - COGS) ÷ revenue × 100. At 60%, 60 agorot of each shekel remain.

Why it matters

Gross margin shows whether the business model can pay for itself: it is the share of every shekel of sales left to cover rent, salaries, marketing and profit.

Common mistakes

Treating gross profit as money the owner can take, before rent, salaries, marketing and tax are paid.

Related terms

Worked exampleIllustration

A ₪100 sale, and the markup trap

One product, prices excluding VAT.

  1. A product costs ₪40 to make or deliver and sells for ₪100. The gross profit is ₪60, so the margin is 60 ÷ 100.

    60%

  2. The markup trap: the same ₪40 priced at cost plus 50% sells for ₪60 and leaves ₪20 of gross profit, so the margin is 20 ÷ 60.

    33.3%

  3. Pricing for a target: a 60% margin on a ₪40 cost needs a price of 40 ÷ (1 - 0.6).

    ₪100

The 60% still has to pay rent, salaries and marketing before there is any net profit.

Illustration

One sale, split in two

  1. Price₪100
  2. Cost of the product-₪40
  3. Gross profit₪60

A gross profit of ₪60 is a 60% margin on the price. Raise the cost and watch the margin shrink.

A price split into the cost of the product and the gross profit it leaves. The margin is the gross profit divided by the price.

The markup trap

Priced for a 60% margin

  1. Price₪100
  2. Cost of the product-₪40
  3. Gross profit₪60

Gross margin: 60%.

Priced at cost plus a 50% markup

  1. Price₪60
  2. Cost of the product-₪40
  3. Gross profit₪20

Gross margin: 33.3%, not 50%.

A 50% markup on the cost is only a 33.3% margin on the price. To keep 60% of every price, price by margin, not by markup.

The same product priced two ways, drawn on one scale: priced for a margin, and priced at cost plus a markup.

Definition

Gross margin is gross profit expressed as a percentage of revenue: (revenue - cost of goods sold) ÷ revenue × 100. On the P&L it is the gross profit line, the first subtotal after revenue and the cost of sales, read as a share. Because it is a share, it lets you compare months, products and businesses of different sizes. It is not markup either: markup is measured on the cost, margin on the price. In a service business the cost of sales is the direct labour of whoever delivers the work, subcontractors and materials for the job, while rent and admin sit in overhead. Three margins are easy to confuse: gross margin subtracts only the cost of sales, contribution margin subtracts only the variable costs, and net margin subtracts everything, down to tax.

Why it matters

Do not read it as the owner's profit. A 50% margin on ₪100,000 of revenue leaves ₪50,000 of gross profit, and rent, marketing, salaries and the tax on profit still come out of that.

Directly related: Gross Profit, COGS, P&L.

Formula

Gross Margin Percentage = ((Revenue - Cost of Goods Sold) / Revenue) * 100

Improvement tips

  • Put every direct cost into the cost of sales: materials, the direct labour of whoever delivers the work, subcontractors and shipping from the supplier.
  • Set prices from the margin you need: price = cost ÷ (1 - target margin).
  • Review the margin of each product every quarter, so rising supplier prices cannot erode it unnoticed.
  • Negotiate volume prices with suppliers or cut waste to lower the cost of each unit.

Common mistakes

  • Forgetting what a discount does to the margin. A 10% discount on a product with a 40% margin takes a quarter of its gross profit.
  • Confusing gross margin, a percentage, with gross profit, an amount in shekels.
  • Counting card fees or shipping to customers as direct costs. They are selling expenses and sit below gross profit.

Related terms

FinanceBeginner

Gross Profit

Gross profit is revenue minus the cost of goods sold (COGS): what is left from sales after goods, materials and direct labour. Rent and salaries come from it.

FinanceBeginner

COGS

COGS (cost of goods sold) is the cost of the goods or services sold in a period: goods, materials and direct labour. Revenue minus COGS is gross profit.

FinanceBeginner

P&L

A P&L (profit and loss statement, or PnL) sums up a business's revenue and expenses for a period and shows if it made or lost money. Profit on it is not cash.

FinanceBeginner

Overhead

Overhead is the indirect cost of running a business, like rent, bookkeeping, insurance and admin salaries, that cannot be traced to one product or customer.

FinanceBeginner

Break-even point

The break-even point is the sales level where revenue covers all costs, no profit and no loss: fixed costs ÷ what each sale leaves after variable costs.

FinanceBeginner

Revenue

Revenue is everything a business sold in a period, before any costs and without the VAT on the invoice. It is the P&L's top line, not profit and not cash.

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Quick check

What does a gross margin of 60% mean?

Choose an answer

Frequently asked questions

Do I need to understand gross margin before starting a business?
Yes. Gross margin tells you whether your prices leave enough of each sale to pay for everything else. Without it, you can launch a product that loses money on every sale.
When does gross margin first become relevant for a new business?
When you set prices and talk to suppliers. Working it out early tells you whether the business model holds up before you invest serious money.
Is there a healthy gross margin I should aim for?
It depends on the industry, and this page quotes no benchmark without a sourced, dated figure behind it. Compare yourself with businesses like yours, and above all check that your margin covers your own overhead with room to spare.
How does gross margin affect the price of a new product?
Start from the margin you need and work back to the price: price = cost ÷ (1 - target margin). A ₪40 cost at a 60% target margin needs a ₪100 price.
Why does gross margin matter for a business that is already running?
It shows how much of each sale is left after direct costs. A falling margin is often the first sign of supplier price rises or too many discounts, long before the bank balance shows it.
What goes wrong when a business ignores its gross margin?
Sales can grow while the business loses money, because direct costs eat too much of each sale and nothing is left for rent or salaries.
How do I calculate gross margin without stopping daily work?
Once a month, take revenue, subtract the cost of sales, divide by revenue and multiply by 100. Your monthly sales and expense reports are enough.
How can I protect my margin when supplier prices rise?
Negotiate volume prices, find other suppliers, cut waste or raise your prices. Work the new price out from the target margin, not by adding the supplier's increase on top, which keeps the shekels but lowers the margin.
What does gross margin mean in plain words?
It is the share of each sale you keep after paying the direct cost of what you sold. If a product costs ₪40 to make and sells for ₪100, the gross margin is 60%.
Is gross margin the same as net profit?
No. Gross margin subtracts only direct costs such as materials and direct labour. Net profit is what is left after rent, marketing, interest and tax as well.
Does VAT count when I calculate gross margin?
No. Work it out on prices and costs without VAT. The VAT you collect from customers goes to the state, so it is neither your revenue nor your cost.
Is gross margin risky to ignore?
Yes. Without it you can sell at a loss without noticing, especially after a round of supplier price rises. Checking it takes a few minutes a month.

Sources: IFRS Foundation, IAS 1 Presentation of Financial Statements, checked September 2026

Last reviewed: 2026-09-23

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