What is a gross margin?

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Gross margin, also known as gross profit margin or gross margin ratio, is a financial metric that shows the percentage of revenue a company retains after subtracting the cost of goods sold (COGS). It reflects how efficiently a business produces and sells its products, and is calculated by dividing gross profit by net sales and multiplying by 100. A high gross margin indicates strong pricing strategies and cost control, which are essential for profitability-especially in ecommerce and print-on-demand business models where product costs and pricing directly impact financial performance.

How to calculate gross margin?

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To calculate gross margin, start by determining gross profit, which is net sales minus the cost of goods sold. Then divide that number by net sales and multiply by 100 to get the percentage. The formula is:
Gross Margin = [(Net Sales – COGS) / Net Sales] × 100
This calculation helps businesses evaluate their cost structure, monitor profitability, and identify areas where they can reduce expenses or adjust pricing to improve margins. For ecommerce sellers, understanding gross margin is vital when scaling product lines or testing new pricing strategies.

How to calculate the gross profit margin

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The terms gross margin and gross profit margin are often used interchangeably, but both involve analyzing the relationship between revenue and cost of goods sold. Gross profit margin is calculated by dividing gross profit by revenue, then multiplying by 100. This percentage helps companies measure the portion of revenue that remains after direct costs are deducted, offering a key insight into profitability and cost efficiency. Tracking this metric over time can help brands selling custom products adjust operations and stay competitive.

What is a good gross margin?

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A good gross margin depends on the industry, business model, and market conditions, but higher margins generally indicate better profitability and operational efficiency. For product-based businesses, including print-on-demand or dropshipping stores, gross margins can range widely depending on sourcing costs and pricing strategy. Monitoring gross margin trends and comparing them to industry benchmarks helps business owners make informed decisions about pricing, supplier relationships, and marketing investment. To improve gross margin, companies can reduce production costs, increase prices, optimize inventory, or refine their product offerings to maximize value and minimize expenses.

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