Gross margin

Gross margin is revenue minus the cost of the goods sold, as a share of revenue. It is wider than contribution margin, which also removes shipping, fees and returns.

Stock photos and example labels, not customers.

Definition

Gross margin is revenue minus the cost of the goods sold, as a share of revenue. It is wider than contribution margin, which also removes shipping, fees and returns.

FormulaGross margin = (revenue - cost of goods sold) / revenue

Example with made-up numbers: An order of 50 has goods that cost 20. Gross margin = (50 - 20) / 50 = 60 percent. After shipping, fees and returns the contribution margin may be 48 percent.

How to use it

Gross margin is easy to find in accounting, which is why it is often used for ad targets. It overstates room for ads, because shipping, payment fees and returns come out of the same order.

For ad decisions prefer contribution margin, and keep gross margin for the finance view.