What is Gross Margin?

How to Calculate Gross Margin

Gross margin = (Revenue − COGS) ÷ Revenue × 100

Revenue here means net sales, so what customers actually paid for products after discounts and refunds. COGS is what those same products cost you, like the supplier price or what it costs to make them. Pull both numbers from the same orders and the same dates.

How a Discount Eats Into Gross Margin

A discount comes straight out of gross profit, because the candle still costs $14 to make no matter what you charge. Take 20% off and it sells for $32. Gross profit drops to $18, and gross margin falls to about 56% ($18 ÷ $32).

The price fell 20%, yet the profit on each candle fell 31%. If 100 full-price candles earn you $2,600 in gross profit, you'd have to sell about 145 on sale to match it.

That's why your margin should set how deep a discount you can afford. If you're trying to pick the number, start with our guide to choosing a discount percentage. Want to know whether a sale actually paid off? Check our guide to discount ROI and gross margin. In our app, Growth Suite, you set a minimum and maximum discount for offers, so you can keep each one inside your margin.

Gross Margin, Gross Profit and Profit Margin

Gross profit is the dollar amount: the $26 you make on the full-price candle. Turn that into a share of the price and you get gross margin, 65%. Profit margin usually means net profit margin, which takes away every cost, including ads, apps, fees and staff. That's why it comes out lower.

On its own, gross margin can fool you. A store with a 60% gross margin still loses money if ads, shipping and fees cost more than 60 cents of each sales dollar.

Where Shopify Shows Your Margin

Open a product in your Shopify admin and scroll to the pricing section. Once you enter a "Cost per item," Shopify shows the profit and margin right next to the price. Each variant can have its own cost.

That margin uses the price set on the product, though. Discount codes and automatic discounts come off later, in the cart or at checkout, so your real margin on a discounted order is lower. Shopify's profit reports use the same costs, and if a product has no cost entered, there's no margin to show.

Margin Isn't Markup

Both start with gross profit. The difference is what you divide it by: markup uses the cost, margin uses the price.

Say a candle costs $14 and sells for $28. That's a 100% markup, since the price is twice the cost, but the gross margin is only 50% ($14 ÷ $28). It's an easy one to mix up. If you want a 50% margin and just add 50% to cost, you'd price at $21 and get a 33% margin ($7 ÷ $21). Markup has no ceiling, while margin can't reach 100% unless the product costs nothing.

Related Terms

• Cost of Goods Sold (COGS): what the products you sold cost you.
• Breakeven Point: the sales level where you stop losing money.
• Discount Percentage: how much a discount takes off the price.
• Pricing Strategy: how you decide what to charge.
• Return on Investment (ROI): what you got back for what you spent.