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Gross margin is one of the most important metrics in business finance. It tells you what percentage of revenue remains after subtracting the direct cost of goods sold. A gross margin calculator lets you work out this figure instantly from any two of the three key inputs: revenue, cost, and gross margin percentage.
Gross Margin (%) = (Revenue - Cost) / Revenue × 100. This differs from markup, which calculates profit as a percentage of cost rather than revenue. Confusing the two is one of the most common pricing mistakes in small business, as noted by Harvard Business Review.
Gross Margin vs Markup: Key Difference
If you buy a product for $100 and sell it for $150:
- Gross Profit = $150 - $100 = $50
- Gross Margin = $50 / $150 = 33.3%
- Markup = $50 / $100 = 50%
The markup is always higher than the margin for the same profit. Given that, using the wrong formula when setting prices can leave you undercutting your actual target margin.
Gross Margin by Industry
| Industry | Typical Gross Margin |
|---|---|
| Software / SaaS | 70-90% |
| Retail (apparel) | 45-60% |
| Restaurants | 60-70% |
| Manufacturing | 25-40% |
| Grocery retail | 25-30% |
On top of that, knowing your industry's typical gross margin helps you figure out whether your business is competitive or if costs need to be reduced. The Investopedia gross margin guide provides additional context and interpretation.
Three Calculation Modes
This calculator supports three input modes so you can narrow down the unknown from any combination you have:
- Revenue + Cost: Computes gross margin % and markup %
- Revenue + Margin: Works out cost and gross profit
- Cost + Margin: Calculates revenue and profit
With that in mind, if you know your target margin and cost, you can carry out a reverse calculation to set your selling price. For example, to achieve a 40% margin on a $60 cost item: Revenue = $60 / (1 - 0.40) = $100.
Gross Margin and Net Margin
Gross margin excludes operating expenses, interest, and taxes. Net margin accounts for all of these. A business with 60% gross margin but 5% net margin has very high overhead. As a result, gross margin tells you production efficiency while net margin tells you overall business health. Use our Markup Calculator for pricing scenarios and the Commission Calculator to build up total cost models including sales compensation. The Corporate Finance Institute provides a thorough breakdown of how gross margin fits into the income statement.