What Is Gross Margin?
7 min read · Updated 2026-06
Definition
Gross margin is the percentage of revenue left after subtracting the direct cost of your products (COGS). It tells you whether your pricing makes sense before overhead eats into it.
Think of it as your first reality check. If gross margin is low, everything else is a struggle. You cannot marketing your way out of a pricing problem.
Formula
Gross Margin = ((Revenue − COGS) ÷ Revenue) × 100
COGS = what you paid for the products you sold. If you buy a shirt for $12 and sell it for $40, COGS is $12 and gross margin is 70%.
Example
A skincare store sells a moisturizer for $38. It costs $7 to manufacture (including packaging). Monthly sales: 500 units.
- Revenue: 500 × $38 = $19,000
- COGS: 500 × $7 = $3,500
- Gross Profit: $15,500
- Gross Margin: 81.6% ($15,500 ÷ $19,000) undefined
That's excellent. But a consumer electronics store selling a $200 Bluetooth speaker that costs $130 to source has only a 35% gross margin.
Common Mistakes
- Including operating expenses in COGS. Shopify subscription, ad spend, and app costs are not COGS.
- Not updating COGS when supplier prices change. Your supplier raised prices 8% last quarter. Did you update your calculations?
- Averaging margins across products. Your store average might be 55%, but if one product runs at 30% and another at 75%, the average hides problems.
Industry Benchmarks
| Industry | Typical Gross Margin |
|---|---|
| Jewelry | 55–70% |
| Clothing | 45–60% |
| Beauty | 60–75% |
| Food & Beverage | 25–40% |
| Digital Products | 80–95% |
FAQ
What is a good gross margin for a Shopify store?
Aim for 50% or higher for physical products. Below 40% and you will struggle to cover marketing, shipping, and overhead. Digital products can reach 80–90%.
How is gross margin different from markup?
Gross margin divides profit by selling price. Markup divides profit by cost. A product costing $30 sold for $60 has a 50% gross margin but a 100% markup.
Can gross margin be over 100%?
No. Since gross margin divides profit by revenue, it cannot exceed 100%. If you see numbers over 100%, you might be calculating markup instead.
Should I include shipping costs in COGS?
Strictly, no. COGS is the cost of the product itself. But for quick checks, many merchants include inbound shipping in COGS. Just be consistent.
How do I improve my gross margin?
Three levers: raise prices, negotiate better supplier pricing, or switch to higher-margin products. Most wins come from auditing worst-margin products.
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