Glossary · UK
What is Gross Profit Margin?
The percentage of revenue left after deducting only the direct cost of goods or services sold, before overheads, interest and tax are taken into account.
Full Definition
Gross profit margin measures how much of a business's revenue remains after subtracting the direct cost of producing or buying in the goods or services it sells -- known as the cost of goods sold (COGS) -- expressed as a percentage of revenue: gross profit (revenue minus COGS) divided by revenue, multiplied by 100. Because it only deducts direct costs (raw materials, stock bought for resale, direct labour tied to production) and ignores indirect overheads such as rent, marketing, admin salaries, interest and tax, gross profit margin is typically the highest of the three common margin figures, sitting above operating profit margin (which also deducts overheads) and net profit margin (which deducts everything, including interest and tax). Gross profit margin is most useful for understanding the fundamental economics of what a business sells -- a retailer buying stock at £60 and selling it at £100 has a 40% gross margin regardless of how efficiently it runs its shops or offices -- and is widely used to compare pricing power and production efficiency between businesses in the same sector, spot when supplier costs are eating into margins, and set minimum viable selling prices. A healthy gross margin does not guarantee overall profitability, however: a business can have a strong gross margin but still make a net loss if its overheads, interest costs or tax bill are too high relative to the gross profit generated, which is why lenders and investors look at gross, operating and net margins together rather than any single figure in isolation.