Gross Profit Margin Percentage

A Gross Profit Margin Percentage is a microeconomic measure based on the ration between gross profit (difference net revenue and cost of goods sold) relative to net revenue.

• Context:
  • It can be reported in a Gross Profit Margin Report.
  • It can (typically) be calculated as (Org. Revenue - Cost of Goods Sold) / Org. Revenue.
  • …
• Example(s):
  • Facebook's Gross Margin, 2021-Q1
  • …
• See: Net Margin, Operating Margin.

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References

2017a

• (Wikipedia, 2017) ⇒ https://en.wikipedia.org/wiki/Gross_margin Retrieved:2017-2-17.
  • Gross margin is the difference between revenue and cost of goods sold, or COGS, divided by revenue, expressed as a percentage. Generally, it is calculated as the selling price of an item, less the cost of goods sold (production or acquisition costs, essentially). Gross Margin is often used interchangeably with Gross Profit, but the terms are different. When speaking about a dollar amount, it is technically correct to use the term Gross Profit; when referring to a percentage or ratio, it is correct to use Gross Margin. In other words, Gross Margin is a % value, while Gross Profit is a $ value.

    Gross Margin is a type of profit margin, specifically a form of profit divided by net revenue: for example, gross (profit) margin; operating (profit) margin; net (profit) margin; etc.

2017b

• (Wikipedia, 2017) ⇒ https://en.wikipedia.org/wiki/gross_margin#Construction Retrieved:2017-2-17.
  • Investopedia defines Gross margin as:

    Gross Margin (%) = (Revenue – Cost of goods sold) / Revenue It can be expressed in absolute terms: Gross margin = net sales – cost of goods sold + annual sales return or as the ratio of gross profit to revenue, usually in the form of a percentage: [math]\displaystyle{ \text{Gross Margin Percentage} = \frac{\text{Revenue - COGS}}{\text{Revenue}}*100\% }[/math]

    Cost of sales (also known as cost of goods sold or COGS) includes variable costs and fixed costs directly linked to the sale, such as material costs, labor, supplier profit, shipping-in costs (cost of getting the product to the point of sale, as opposed to shipping-out costs which are not included in COGS), etc. It does not include indirect fixed costs like office expenses, rent, administrative costs, etc.

    Higher gross margins for a manufacturer reflect greater efficiency in turning raw materials into income. For a retailer it will be their markup over wholesale.

    Larger gross margins are generally considered ideal for most companies, with the exception of discount retailers who instead rely on operational efficiency and strategic financing to remain competitive with lower margins.

    Two related metrics are unit margin and margin percent:

     :Unit margin ($) = Selling price per unit ($) – Cost per unit ($)

     :Margin (%) = Unit margin ($) / Selling price per unit ($) * 100%

    "Percentage margins can also be calculated using total sales revenue and total costs. When working with either percentage or unit margins, marketers can perform a simple check by verifying that the individual parts sum to the total."

     :To verify a unit margin ($): Selling price per unit = Unit margin + Cost per Unit

     :To verify a margin (%): Cost as % of sales = 100% – Margin %

    "When considering multiple products with different revenues and costs, we can calculate overall margin (%) on either of two bases: Total revenue and total costs for all products, or the dollar-weighted average of the percentage margins of the different products."

    How gross margin is used in sales

    Retailers can measure their profit by using two basic methods, markup and margin, both of which give a description of the gross profit. The markup expresses profit as a percentage of the retailer's cost for the product. The margin expresses profit as a percentage of the retailer's sales price for the product. These two methods give different percentages as results, but both percentages are valid descriptions of the retailer's profit. It is important to specify which method you are using when you refer to a retailer's profit as a percentage.

    Some retailers use margins because you can easily calculate profits from a sales total. If your margin is 30%, then 30% of your sales total is profit. If your markup is 30%, the percentage of your daily sales that are profit will not be the same percentage.

    Some retailers use markups because it is easier to calculate a sales price from a cost using markups. If your markup is 40%, then your sales price will be 40% above the item cost. If your margin is 40%, your sales price will not be equal to 40% over cost (in fact, it will be approximately 67% above the item cost).

    Markup

    The equation for calculating the monetary value of gross margin is: gross margin = sales – cost of goods sold

    A simple way to keep markup and gross margin factors straight is to remember that:

    1. Percent of markup is 100 times the price difference divided by the cost.
    2. Percent of gross margin is 100 times the price difference divided by the selling price.
  • Gross margin (as a percentage of Revenue)

    Most people find it easier to work with gross margin because it directly tells you how much of the sales revenue, or price, is profit. In reference to the two examples above:

    The $200 price that includes a 100% markup represents a 50% gross margin. Gross margin is just the percentage of the selling price that is profit. In this case 50% of the price is profit, or $100.

     :: [math]\displaystyle{ \frac{$200 - $100}{$200} * 100\% = 50\% }[/math] In the more complex example of selling price $339, a markup of 66% represents approximately a 40% gross margin. This means that 40% of the $339 is profit. Again, gross margin is just the direct percentage of profit in the sale price.

    In accounting, the gross margin refers to sales minus cost of goods sold. It is not necessarily profit as other expenses such as sales, administrative, and financial must be deducted. And it means companies are reducing their cost of production or passing their cost to customers. The higher the ratio, the better.

    Converting between gross margin and markup (Gross Profit)

    Converting markup to gross margin : [math]\displaystyle{ \text{gross margin} = \frac{\text{markup}}{1 + \text{markup}} }[/math] :

    :Examples:

     ::Markup = 100% = 1

     ::: [math]\displaystyle{ \text{gross margin} = \frac{1}{1 + 1} = 0.5 = 50\% }[/math] ::Markup = 66.7% = 0.667

     ::: [math]\displaystyle{ \text{gross margin} = \frac{0.667}{1 + 0.667} = 0.4 = 40\% }[/math] Converting gross margin to markup

     : [math]\displaystyle{ \text{markup} = \frac{\text{gross margin}}{1 - \text{gross margin}} }[/math]

     :

    :Examples:

     ::Gross margin = 50% = 0.5

     ::: [math]\displaystyle{ \text{markup} = \frac{0.5}{1 - 0.5} = 1 = 100\% }[/math] ::Gross margin = 40% = 0.4

     ::: [math]\displaystyle{ \text{markup} = \frac{0.4}{1 - 0.4} = 0.667 = 66.7\% }[/math] Using gross margin to calculate selling price

    Given the cost of an item, one can compute the selling price required to achieve a specific gross margin. For example, if your product costs $100 and the required gross margin is 40%, then

    Selling price = $100 / (1 – 40%) = $100 / 0.6 = $166.67

    Gross Margin tools to measure retail performance

    Some of the tools that are useful in retail analysis are GMROII, GMROS and GMROL.

    GMROII: Gross Margin Return On Inventory Investment

    GMROS: Gross Margin Return On Space

    GMROL: Gross Margin Return On Labor

    Differences between industries

    In some industries, like clothing for example, profit margins are expected to be near the 40% mark, as the goods need to be bought from suppliers at a certain rate before they are resold. In other industries such as software product development the gross profit margin can be higher than 80% in many cases.

2016

• http://www.investopedia.com/terms/g/gross_profit_margin.asp
  • QUOTE: Gross profit margin is a financial metric used to assess a company's financial health and business model by revealing the proportion of money left over from revenues after accounting for the cost of goods sold (COGS). Gross profit margin, also known as gross margin, is calculated by dividing gross profit by revenues. Also known as "gross margin." …

    … There are several layers of profitability that analysts monitor to assess the performance of a company, including gross profit, operating profit and net income. Each level provides information about a company's profitability. Gross profit, the first level of profitability, tells analysts how good a company is at creating a product or providing a service compared to its competitors. Gross profit margin, calculated as gross profit divided by revenues, allows analysts to compare business models with a quantifiable metric.

    Gross margin changes may also be driven by industry changes in regulation or even changes in a company's pricing strategy. If a company sells its products at a premium in the market, all other things equal, it has a higher gross margin. The conundrum is if the price is too high, customers may not buy the product.

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