Gross margin is what is left from your revenue after you subtract the cost of goods sold, shown as a percentage. It is the first margin in a profit and loss statement, above operating costs. It shows how much of each sale is available to cover your fixed costs.
An example. Revenue of 200,000 euros minus COGS of 80,000 euros leaves 120,000 euros, a gross margin of 60 percent.
Gross margin tells you whether your business model can carry its fixed costs at all. The formula is revenue minus COGS, divided by revenue. A high margin means each extra sale contributes a lot. A low margin means you need volume.
Worked example. A cafe sells 12,000 coffees a month at 3.50 euros, so revenue is 42,000 euros. Beans, milk, cups and lids cost 0.95 euros per coffee, so COGS is 11,400 euros. Gross profit is 30,600 euros and gross margin is 72.9 percent. Rent, staff and energy come to 27,000 euros, leaving 3,600 euros. Now drop the price to 3.00 euros. Revenue falls to 36,000 euros, gross profit to 24,600 euros, and the cafe loses 2,400 euros a month. A price cut of 50 cents turned a profit into a loss.
Typical margins differ by model. Software often sits above 75 percent, agencies between 40 and 60 percent, retail and e-commerce between 20 and 50 percent, food service and hardware lower. Comparing your margin with a business that has a different model tells you nothing useful.
Two misunderstandings show up often. First, founders confuse gross margin with net margin. Gross margin is measured before rent, salaries and marketing. You can have 70 percent gross margin and still lose money every month. Second, they apply one blended margin to every product. If you sell a mix, calculate the margin per product line. The weak performer is usually hidden inside the average.
Gross margin appears in the financial section of a Foundor plan, as a percentage and as an amount per year.
