Gross Margin vs Net Margin
Gross margin focuses on revenue after direct costs, while net margin considers a broader set of expenses.
How the math works
Gross margin is revenue minus the direct cost of producing what was sold (cost of goods sold), divided by revenue. Net margin subtracts everything — operating expenses, interest, taxes — from revenue, so it's always equal to or lower than gross margin for the same business.
Worked example
A business with $500,000 revenue, $300,000 cost of goods sold, and $150,000 in operating expenses/taxes has a gross margin of 40% ($200,000/$500,000) but a net margin of only 10% ($50,000/$500,000) — the gap shows how much overhead is consuming the gross profit.
What to watch for
- A healthy gross margin with a thin net margin usually points to high overhead, not a pricing problem
- Comparing gross margins across companies only makes sense within the same industry, since cost structures vary widely
- Net margin is the more complete picture of actual profitability, but gross margin is often more useful for pricing decisions
Practical takeaway
Look at both figures together — gross margin tells you if your pricing covers production cost, net margin tells you if the whole business is actually profitable.