Calculate gross profit and gross margin percentage to understand your pricing efficiency and cost structure.
Total revenue for the period.
Direct costs of delivering your product or service.
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Gross profit is revenue minus the direct costs of producing your product or service (Cost of Goods Sold or COGS). This represents the profit before operating expenses.
Gross Profit = Revenue - Cost of Goods Sold (COGS)
COGS = Direct costs (materials, labor, hosting, support, etc.)Gross margin percentage expresses gross profit as a percentage of revenue. This is the key metric for understanding profitability and pricing efficiency.
Gross Margin % = (Gross Profit ÷ Revenue) × 100%
OR
Gross Margin % = ((Revenue - COGS) ÷ Revenue) × 100%Markup and margin are related but different. Markup is the percentage added to costs to determine price, while margin is the percentage of the selling price that is profit.
Markup % = (Gross Profit ÷ COGS) × 100%
To convert: Margin = Markup ÷ (1 + Markup)Gross margin is a critical indicator of business health and scalability. High gross margins mean you have more resources to invest in growth, sales, and marketing. SaaS companies typically target 70-85% gross margins, while e-commerce businesses target 30-50%. Gross margin affects how much you can spend on customer acquisition and still remain profitable.
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