Gross Profit Margin Calculator
Calculate your gross profit margin—the percentage of revenue remaining after subtracting the cost of goods sold (COGS). Essential for understanding product-level profitability.
Example Calculations
| Product | Cost | Price | Profit | Margin |
|---|---|---|---|---|
| Electronics | ₹7,000 | ₹10,000 | ₹3,000 | 30% |
| Clothing | ₹300 | ₹999 | ₹699 | 70% |
| Food Item | ₹80 | ₹120 | ₹40 | 33.3% |
Frequently Asked Questions
What is gross profit margin?
Gross profit margin is the percentage of revenue left after subtracting COGS (direct costs only). It excludes operating expenses, taxes, and interest. Formula: (Revenue - COGS) / Revenue × 100.
What is a healthy gross margin?
It depends on your industry. 50%+ is excellent for most businesses. SaaS can be 80%+. Commodity businesses may be 20-30%. Compare with industry averages.
How is gross margin different from net margin?
Gross margin only deducts COGS (direct costs like materials, labor). Net margin deducts ALL costs including operating expenses, interest, and taxes. Net margin is always lower than gross margin.
Understanding Gross Profit Margin
What is Cost of Goods Sold (COGS)?
COGS includes only direct costs to produce your product:
**For Manufacturers:**
- Raw materials
- Direct labor (factory workers)
- Manufacturing overhead (factory utilities)
**For Retailers:**
- Purchase cost of inventory
- Shipping to your warehouse
- Direct labor for handling
**For Service Businesses:**
- Direct labor (billable hours)
- Materials used in service delivery
- Subcontractor costs
**NOT Included in COGS:**
- Rent (unless factory rent)
- Marketing and sales
- Administrative salaries
- Interest and taxes
Gross Margin Formula and Calculation
**Formula:**
Gross Profit = Revenue - COGS
Gross Margin = (Gross Profit / Revenue) × 100
**Example:**
- Monthly Revenue: ₹5,00,000
- Raw Materials: ₹1,50,000
- Direct Labor: ₹80,000
- Manufacturing: ₹20,000
- Total COGS: ₹2,50,000
- Gross Profit: ₹2,50,000
- Gross Margin: 50%
This 50% margin means half your revenue covers direct costs, and half is available for operating expenses and profit.
Improving Gross Profit Margin
**Reduce Material Costs:**
- Negotiate volume discounts
- Find alternative suppliers
- Reduce waste in production
- Standardize materials across products
**Optimize Labor Costs:**
- Improve worker productivity
- Cross-train employees
- Automate repetitive tasks
- Reduce overtime
**Increase Prices Strategically:**
- Add premium features
- Improve packaging/presentation
- Target less price-sensitive customers
- Implement value-based pricing
**Improve Product Mix:**
- Push high-margin products
- Phase out low-margin items
- Bundle low and high margin products
- Introduce premium tiers
Common Gross Margin Mistakes
**1. Including Operating Expenses**
COGS should only include DIRECT costs. Rent, marketing, and admin salaries go elsewhere.
**2. Ignoring Shrinkage/Waste**
Factor in spoilage, theft, and damage when calculating true COGS.
**3. Not Tracking by Product**
Calculate margin per product, not just overall. You may have profit-killers hiding.
**4. Using Inconsistent Periods**
Compare same periods year-over-year. Seasonality affects margins.
**5. Forgetting Shipping Costs**
Inbound freight to your warehouse is part of COGS for retailers.