Gross margin.
aka gross profit margin, GM
What is left of each sale after you have paid to make the thing.
What it actually means
Gross margin is the share of revenue left after subtracting the direct cost of producing what was sold. If a product sells for $100 and costs $40 to make and deliver, gross margin is 60%.
Direct costs (the accountants say “cost of goods sold”) are the ones that scale with each unit: materials, factory labour, hosting for a software product, shipping. Rent, marketing and the CEO’s salary are not in there; they come later, further down the income statement.
Gross margin is the first thing an investor checks because it sets the ceiling on everything else. A 20% margin business has to sell five times as much as an 80% margin business to earn the same gross profit. That is why software companies (70–90% margins) are valued differently from supermarkets (20–30%), and why “margin expansion” gets a stock price moving.
Where you'll hear it
At $29 we are at a 58% gross margin after payment fees and hosting. The $39 tier takes us to 68%, which funds the support team without touching the ad budget.
Translation: the price change is not greed, it is the difference between a hobby and a company.
It shows up in pricing meetings, investor decks (“gross margin has improved from 41% to 63% as we moved off third-party fulfilment”) and in any debate about whether a business is worth scaling. Low margin plus high volume can work. Low margin plus low volume is a charity.
The pop-culture version
Beans, milk, the cup, the lid, a few seconds of the barista’s time: $1.20. Price: $5. Gross margin: $3.80, or 76%.
That $3.80 is not profit. It still has to pay the rent, the lights, the manager and the loyalty-card app. But it is the money that can pay for those things. A coffee shop with a 76% gross margin can afford a nice location. One selling the same latte at $2 cannot, no matter how busy it gets.
Every business is a latte. The question is always what is left after the cup.
This is also why “we lose money on each one but make it up in volume” is a joke in finance circles. If gross margin is negative, more sales just means losing more money, faster.
Say it like you mean it
“Gross margin is 62%, so each extra customer leaves us $62 of every $100 to cover overhead.”
States the number and what it means for the rest of the business.“Our margin is 62%.”
Which margin? Gross, operating and net are three different numbers. Finance people will ask, so say which.Quick ladder to keep straight: gross margin is after direct costs; operating margin is after rent, salaries and marketing too; net margin is after interest and tax as well. Each step down is smaller, and the gaps between them tell you where the money goes.
The three margins compared, with sector benchmarks and the questions analysts ask when one of them moves.
Decoded next
Decoded by the Kurums editorial team. Kurums Decoded translates the language of business for people who are new to it. Definitions are kept short on purpose; the serious version above goes deep. Nothing here is financial, legal or career advice.
Discover more from Kurums | Business Intelligence
Subscribe to get the latest posts sent to your email.