The gross margin measures the profitability of your business, that is, what percentage of profit you earn from each sale. For example, if you sell your products for $40 but spend $20 to put them in stores, you are earning only $20.
It is interesting to analyze your margin as you may find that one product has a much lower gross margin than another, so it may be better to review your strategy. Now, it doesn’t mean that you must necessarily prioritize products with the highest margin. This is relative depending on your strategy. If you want to gain volume or open new sales channels, you can choose to give up margin, for example. Learn more about how to understand if your margin is adequate here.
In addition, the gross margin is one of the main factors that an entrepreneur should consider when placing a price on his product.
Now, it is important to know that gross margin is a different concept than profit. Profit is the total amount you earn on each sale, that is, the amount leftover from the sale of each product after you pay all the bills involved in producing and marketing it. Note that in order to calculate costs, you should ONLY consider those directly involved in the production and sale of the product (such as raw material cost, freight, factory maintenance) or in the execution of a service (salary of the people who perform the service, material costs for execution). Do not consider the total administrative costs of the business, taxes, etc.
Although there is a difference, to calculate your gross margin, you will need to calculate your gross profit.
Gross margin = Gross profit / total revenue x 100
A calculation example:
Consider that an e-commerce company has a gross revenue of $15,000.00.
In order to execute these sales, it is necessary to discount the costs directly involved, such as R $ 4,000 of raw material, $1,000 of freight and $4,000.00 of storage. So, the gross profit would be R $6,000.00.
So, assuming the same example above, we would have:
$6,000 (gross profit)/$15,000 (total revenue) x 100 = 40% gross margin.