Gross margin – n : finance/accounting term; a
ratio, usually expressed as a percentage, equal to the selling price minus the
cost of goods sold (COGS) – i.e., the gross profit – divided by the selling
price. Gross margin is essentially the same as gross profit, but expressed as a
percentage of selling price or revenue rather than in absolute dollars.
Example:
Some industries, such as software, are inherently high-gross margin businesses,
since the cost to produce each incremental unit (the cost of the CD or the
electronic download from the company’s website) is near-zero compared to its
selling price. If a software company charges $280.00 per unit for its product
and incurs a production cost (disc and packaging), or cost of goods sold, of
$7.00, then its gross margin is calculated as ($280 - $7) / $280 = 97.5%. The gross
profit in this example is $273 per unit.
In a shoe
store, the gross margin on a pair of $100 shoes is determined by subtracting
the cost to the store of acquiring the product (as opposed to its original cost
of production by the manufacturer).
Therefore, if a given pair of shoes is acquired by the store for $50 and sold
for $100
(referred to in the retail industry as 100% mark -up), then the gross margin is
calculated as ($100 - $50) / $100 = 50%.
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Adapted from "The CompanyCrafters Entrepreneur's Dictionary"
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