Gross Profit Margin II. Profitability ● live
The gross profit margin measures what percentage of revenue a company retains after deducting the direct costs of producing its goods or services — known as the Cost of Goods Sold (COGS). It is the first line of profitability analysis and reveals how efficiently a company produces its core output.
Gross profit is the money left over before paying operating expenses like salaries, rent, marketing, and administration. A high gross margin means the company has substantial resources to cover these overheads and still generate a net profit. A low gross margin means the company is operating on thin ice — any cost increase or revenue shortfall can quickly eliminate all profit.
Crucially, gross margin varies enormously by industry. A software company may have a gross margin above 70% while a grocery retailer operates at 25%. Never compare gross margins across different industries.
Gross margin is the first step in understanding profitability. Each subsequent margin ratio deducts more costs:
| Include in COGS | Exclude from COGS |
|---|---|
| Raw materials & components | Salaries of admin/management staff |
| Direct manufacturing labour | Marketing & advertising costs |
| Factory overhead (utilities, depreciation of plant) | Rent of office space |
| Freight & delivery to customer | R&D expenses |
| Cost of services delivered (for service businesses) | Interest expense |
For service businesses, COGS is the cost of delivering the service — consultant salaries, cloud infrastructure, licensing fees directly tied to service delivery.
| Range | Signal | What it means |
|---|---|---|
| ≥ 40% | Strong | Strong pricing power or cost efficiency. Good foundation for operating profitability. |
| 20% – 40% | Fair | Reasonable margin. Viable but limited buffer against cost increases or pricing pressure. |
| < 20% | Weak | Very thin margin. High sensitivity to input cost changes. Requires operational discipline. |
| < 0% | Critical | Selling below cost of production. Unsustainable — urgent business model review required. |
Source: Damodaran Online, NYU Stern. Gross margin varies more by industry than almost any other ratio — always compare within sector.
| Industry | Median | P25 | P75 |
|---|---|---|---|
| Financial Services | 65.0% | 50.0% | 78.0% |
| Technology | 58.0% | 42.0% | 72.0% |
| Healthcare | 55.0% | 38.0% | 68.0% |
| Telecommunications | 50.0% | 36.0% | 62.0% |
| Real Estate | 45.0% | 30.0% | 60.0% |
| Consumer Goods | 40.0% | 28.0% | 54.0% |
| Retail | 30.0% | 20.0% | 42.0% |
| Manufacturing | 25.0% | 15.0% | 38.0% |
| Energy | 28.0% | 15.0% | 42.0% |
| Company | Revenue | COGS | Gross Profit | Margin | Signal |
|---|---|---|---|---|---|
| SaaS company | 10,000,000 | 2,000,000 | 8,000,000 | 80.0% | Strong |
| Consumer brand | 50,000,000 | 28,000,000 | 22,000,000 | 44.0% | Strong |
| Manufacturer | 80,000,000 | 60,000,000 | 20,000,000 | 25.0% | Fair |
| Equity Group FY2024 | KES 181,789m | KES 61,575m* | KES 120,214m | 66.1% | Strong |
* For banks, COGS = Interest expense. Revenue = Total net income. Gross margin for banks reflects net interest margin and fee spread.
Can gross margin be above 100%?
No. Gross margin is capped at 100% (if COGS = 0) and floored at negative infinity (if COGS > Revenue). A margin above 100% would imply negative costs, which is impossible in practice.
Is gross margin or net margin more important?
Both matter at different stages. Gross margin reveals the core economics of the product or service. Net margin shows what the business ultimately earns after all costs. A company can have an excellent gross margin but poor net margin due to high operating expenses — that's a management efficiency problem, not a product problem.
How do I improve gross margin?
Four levers: (1) raise prices, (2) reduce COGS through supplier negotiation or process efficiency, (3) shift product/service mix toward higher-margin offerings, (4) increase volume to spread fixed manufacturing costs over more units.
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