The first profit number on a profit and loss statement and the most direct measure of whether the product or service itself is profitable. If gross profit doesn't cover operating costs, no amount of scale or cost discipline elsewhere can save the business.

Definition

Gross Profit - revenue minus the direct cost of producing or delivering what was sold. Those direct costs are called Cost of Goods Sold (COGS), Cost of Revenue, or Cost of Sales.

Formula
Gross Profit = Revenue − Cost of Goods Sold (COGS)

Gross Margin = Gross Profit ÷ Revenue × 100%

Common uses

  • Pricing decisions - is the unit economically viable?
  • Margin trend monitoring - gross margin compression is one of the earliest signs of structural trouble
  • Customer mix analysis - which customers or products are most profitable
  • Industry comparison - the standard metric for benchmarking economic efficiency

Watch out

Comparing gross margin from one company to net margin from another isn't meaningful. Always confirm both numbers refer to the same metric before drawing conclusions.

For the full explanation, see Gross Profit Explained.

Related terms