Gross margin: meaning and formula for product brands
Gross margin shows what is left from each sale after the product itself is paid for.
Definition
Gross marginGross margin is the difference between revenue and the cost of goods sold, expressed as a percentage of revenue. For a product brand, cost of goods sold usually includes the landed cost of the product and packaging. The formula is (revenue minus cost of goods sold) divided by revenue, multiplied by 100.
How to calculate gross margin for a product
If a product sells for 20 net of VAT and its landed cost is 8, gross profit is 12 and gross margin is 60 percent. Markup is a different figure: the same product has a markup of 150 percent on cost. Mixing the two is a common reason why price lists are wrong; a retailer asking for a 40 percent margin means 40 percent of its selling price, not 40 percent on top of your price.
What goes into cost of goods sold must be consistent. Most brands include the factory price, packaging, inbound freight, duties and inspection. Some include warehousing and fulfilment; others treat those as operating costs. Decide once and use the same method across SKUs, otherwise comparisons between products mean little. Otherwise a product can look stronger simply because its freight was booked elsewhere.
Gross margin is a ceiling, not profit. Marketplace commissions, advertising, returns and fulfilment come out of it, and in some channels they take most of it. That is why channel planning uses contribution margin as well. A product with a strong gross margin can still lose money in a channel with heavy fees. Check it per channel before you commit to a price.
The guide own brand unit economics works through margins by channel, and our calculator estimates them from your inputs. Price tiers and margins are set in assortment planning.
Related terms
Contribution margin
What a sale leaves after all variable costs, to cover fixed costs and profit.
Landed cost
The full cost of a product once it reaches your warehouse, including freight, duties and fees.
Good-better-best
A range structure with three tiers of quality and price, so each shopper finds a level.
Sell-in
The quantity a brand sells into retailers or distributors, before shoppers buy it.
Frequently asked questions
What is the difference between gross margin and markup?
Gross margin is gross profit divided by selling price. Markup is gross profit divided by cost. A product bought for 8 and sold for 20 has a 60 percent margin and a 150 percent markup.
Does gross margin include marketing costs?
No. Gross margin only subtracts the cost of goods sold. Marketing, fees and overheads come afterwards, in contribution margin and operating profit.
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