In one sentence
Gross margin is the share of revenue left after paying for the products you sold, found by subtracting cost of goods from revenue and dividing by revenue, and it sets how much room you have for everything else.
How to calculate gross margin
Gross margin = (revenue minus cost of goods sold) divided by revenue.
Say you sell a candle for $40 and it costs you $12 to make or buy. Your gross profit is $28. Your gross margin is $28 divided by $40, or 70%.
Cost of goods sold (COGS) is what you paid for the product itself: materials, manufacturing or wholesale cost, and inbound freight if you track it there.
Gross margin vs. contribution margin
A high gross margin can still lose money once shipping and ads come out. That's what contribution margin is for.
Why gross margin matters for ecommerce brands
Gross margin is your budget for everything that isn't product: shipping, payment fees, ads, staff and software. A thin margin limits how much you can spend to win a customer, and it shows up first when you run discounts.
Check it per product, not just for the store. One low-margin bestseller can hide inside a healthy average.
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