Here comes a fundamental concept that makes the difference between a healthy business and one that can die selling a lot: gross margin. And the curious thing is that, although it's a very simple metric to calculate, it's one of the most misunderstood — even by some businesses already in business.
What is gross margin?
El Gross margin represents the benefit you get for each unit sold after discounting the costs directly associated with the production and delivery of your product or service.
In other words, indicate how much you earn for each sale formerly to consider overhead expenses such as rent, administrative staff salaries, marketing campaigns, or software licenses. Only the gross margin should be included in the calculation of gross margin variable costs directly linked to each sale. For example, if you sell t-shirts, these costs would include materials, clothing, transportation, and packaging. If you offer software, the costs of servers, technical maintenance, or direct customer support would be considered.
- It does not include: office salaries, rent, advertising, software, etc.
- YES includes: materials, transport, manufacturing costs or servers (in the case of software).
It only focuses on what you earn for each specific sale, subtracting what it cost you to produce or deliver it. Miscalculating gross margin can lead to making very wrong decisions: thinking that you earn more than you actually earn, or assuming additional costs that cannot actually be covered.
How is it calculated?
The general formula is simple: Gross Margin (%) = [(Revenue — Direct Costs)/Revenue] × 100
Where:
- Revenue: all the money that comes in from sales.
- Direct Costs: what it costs to deliver that product or service (materials, transport, servers, etc.).
Basic example
If you sell a cap for 30€, and it cost you 12€ to manufacture and ship it, your gross margin would be:
- [(30 — 12)/30] × 100 = 60%
That means that for each cap you have 18€ left to cover other expenses or to reinvest.
Gross margin by type of industry
Not all businesses work the same way. Here we compare three industries with very different models:
1. B2B software (company that sells software to companies)
Examples: Notion, HubSpot, Figma
- They sell access to a digital platform.
- They spend a lot at first to create the software, but then each new sale costs next to nothing.
Assumptions:
- Monthly revenue per customer: €1,000
- Direct costs (servers, technical support): 100€
Gross margin
- 90%.
- Very cost-effective. Ideal for climbing.
2. Ecommerce (online sale of physical products)
Here the margins are calculated in stages:
- M1 (Margin 1): Revenue — Product Cost (COGS)
- M2 (Margin 2): M1 — Logistic costs (shipping, packaging)
- M3 (Margin 3): M2 — Marketing (advertising, discounts)
Assumptions:
- Sales price: 50€
- Product cost: 25€
- Shipping and packaging: 7€
- Advertising per customer: 8€
Gross margins:
- M1 = 50%
- M2 = 36%
- M3 = 20%
- Harder to maintain. It all adds up: the product, the shipping, the return, the advertising.
3. Food/Catering
Examples: a restaurant or delivery service
- High product turnover.
- Highly variable costs (ingredients, energy, personnel).
- A lot of waste or room for error.
Assumptions:
- Plate sold: 15€
- Ingredient costs: 5€
- Staff and energy (direct): 3€
Gross margin
- 47%
- More volatile. A robbery, a plate being thrown away or a miscalculation can cause the margin to fall.
Quick comparison
Why is gross margin so important?
Because it marks right from the start how much room you have for maneuver.
If your gross margin is too low, no matter how much you sell: you could end up losing money on every sale.
Gross margin is the first filter of profitability. Without enough gross margin, the rest of the numbers will never close.
In addition, a good understanding of your gross margin allows you to:
- Detect money leaks: Quickly identify if you're losing margin on returns, platform commissions, production declines or poorly negotiated logistics costs.
- Make strategic decisions: If your gross margin is low, you should analyze:
- Can I raise the price without losing customers?
- Can I optimize logistics and save on shipping?
- Can I renegotiate or change suppliers to lower my direct costs?
These small, well-adjusted decisions can make the difference between a sustainable business and one that never stops taking off.
But beware: gross margin is not net margin
Here comes the first major confusion.
Many founders are thrilled to see high gross margins, but forget that many other things have to be paid later on: rents, administrative staff, product development, marketing, financing, taxes...
The net margin reflects what's really left at the end of everything.
A simple example:
- Monthly income: €10,000
- Direct costs (production, logistics): €4,000
- Gross margin: 60%
- Fixed costs (salaries, office, marketing): €4,500
- Net profit: 1,500€ (net profit: 15%)
A good gross margin does not guarantee final return if fixed costs soar.
Economies of Scale: When Selling More Improves Your Margins
One of the great powers of scalable businesses is that as sales volume increases, some direct costs decrease. This is what is known as an economy of scale.
For example, if a company produces 1,000 t-shirts, each one may cost 10€. But if it produces 10,000, the supplier lowers the price to €8, and if it reaches 100,000 units, it may be able to produce them at €6.
This increases gross margin without having to raise prices.
This effect is one of the keys to which large companies can operate with very high margins.
Volume makes it possible to negotiate, optimize processes and automate.
A high gross margin doesn't always mean good cash
Here comes another important nuance, especially for startups: You can have an excellent gross margin and still suffer from cash tensions. Why? Because cash flow does not depend only on how much margin is generated, but on When is it charged and when it is paid:
- If you sell online, you may pay the supplier for the stock 3 months in advance, but customers pay now.
- If it is sold to large companies, the product may be delivered today, but they pay in 60 or 90 days.
- If you develop software, you invest for years before you start billing.
That's why investors look not only at gross margin, but also at the cash cycle of the business.
Gross margin as a strategic tool
When an investor, CFO, or experienced entrepreneur analyzes a business, the first thing they usually look at is gross margin. Why?
- It allows you to compare business models: A SaaS with a gross margin of 90% has nothing to do with an ecommerce of 30%.
- It helps detect money leaks: Uncontrolled logistics costs, high returns, inefficient production...
- Impact on the assessment: Businesses with high gross margin tend to have much higher valuation multiples.
For example, many SaaS startups that sell B2B software (such as Notion or HubSpot) get very high ratings because their gross margin is around 80— 90%. Every new customer generates revenue with almost no additional cost.
On the other hand, in ecommerce or restaurants, each additional sale still has significant costs: product, shipping, logistics, personnel, ingredients...
How to improve gross margin (there's almost always room for improvement)
Fortunately, gross margin can be constantly worked on and optimized:
- Negotiate with suppliers: volume pricing, long-term agreements, centralized purchasing.
- Optimize operations: more efficient processes, quality control, reduction of waste.
- Review the pricing: adjust prices when the market allows it or segment by customers.
- Optimized logistics: delivery routes, better transport agreements, return management.
- Upsells and cross-sells: increase the average ticket per customer.
Even small adjustments can amount to many thousands of euros at the end of the year.
The startup dilemma: grow by sacrificing margins... yes or no?
Many startups, especially early-stage startups, sacrifice gross margin in favor of growth:
- They offer low prices or aggressive promotions.
- They assume very high logistics costs to attract customers.
- They give free shipping or additional services.
Does it make sense? Sometimes yes. The logic is simple: conquer market share first, then optimize margins.
Companies like Amazon, Uber or many SaaS grew like this: for years they prioritized acquisition over profitability per unit.
The risk is that if you don't manage to improve your margin later, the business is not sustainable.
In short
Gross margin isn't just a figure in an Excel. It is the foundation on which any sustainable business is built.
If gross margin doesn't work, no sales volume, marketing campaign, or funding round will compensate.
That's why, whether you're launching your project or if you already have a company up and running, understanding your gross margin, and actively working to improve it, can be the difference between building a solid business and a fragile one.
And now that you understand it well: what business would you set up?
