Gross Margin is the percentage of revenue that remains after subtracting the cost of goods sold (COGS). It measures how efficiently a business produces and sells its products relative to production or acquisition costs.
Why Gross Margin matters
Gross margin reveals how much money is left to cover operating expenses, marketing, and profit after accounting for product costs. For ecommerce brands, a strong margin means greater flexibility to invest in customer acquisition and retention. Monitoring this metric helps assess pricing strategy, sourcing efficiency, and overall business health.
How Gross Margin works
Gross margin is calculated using the formula: (Revenue – Cost of Goods Sold) ÷ Revenue × 100. If a brand sells $100,000 worth of products and its COGS is $60,000, the gross margin is 40%. Companies often track gross margin by product line or category to identify which areas drive the most profit.
Example in ecommerce
A DTC apparel brand sells shirts for $50 each, but each shirt costs $20 to produce and ship. That means a 60% gross margin per sale. The brand uses this margin to fund paid ads, customer service, and influencer partnerships while still maintaining profitability.
Common mix-ups
Gross margin is not the same as markup, which measures how much a product’s price exceeds its cost. It’s also different from net margin, which accounts for all expenses — including operations, taxes, and marketing — to show final profitability.
Best practices
- Aim for a consistent margin target across core products to maintain predictable profitability.
- Regularly review supplier costs, shipping fees, and packaging to protect margins from erosion.
- Use tiered pricing or premium product lines to increase overall gross margin.
- Track margin trends alongside marketing spend to identify when growth is becoming less efficient.
- Analyze gross margin by channel (e.g., DTC vs. wholesale) for better strategic decisions.
Industry benchmarks
- Typical ecommerce gross margins range from 40–60%, depending on product category.
- High-margin categories (e.g., beauty, digital products) can exceed 70%, while low-margin ones (e.g., electronics, grocery) may fall below 25%.
- Healthy, growing DTC brands often target 50%+ gross margin for long-term sustainability.
