Gross margin: the one ratio that tells you if your pricing is honest.
Gross margin is what is left from each euro of revenue after the cost of what you sold — the cleanest signal you have on whether the price you charge actually covers what you pay.
Gross margin is the share of revenue you keep after paying for the goods or ingredients you sold — the percentage left for every other cost in the business. Formula: (Revenue − COGS) ÷ Revenue. The healthy bands by sector: cafe 70-75%, retail 45-55%, salon 80%+, e-commerce 40-60%. A gross margin that slides month over month is the earliest signal that pricing, supplier costs, or product mix has drifted. nouz recomputes it nightly from net revenue and a COGS snapshot, so the number is the one your bank account will agree with.
TL;DR
Definition, in shop-owner English
Cost of goods sold (COGS) is the direct cost of producing what you sold — coffee beans and milk for a cafe, wholesale cost for retail, colour and developer for a salon, product cost plus shipping-in for e-commerce. It does not include rent, salaries, software, marketing, or the owner's time. Those are operating costs, accounted for further down the P&L.
Gross margin is what is left from each euro of revenue after that direct cost is paid. If a €4,80 latte costs you €1,20 in beans, milk, cup and lid, your gross margin on that sale is 75%. The remaining 75% has to cover everything else: rent, staff, your salary, eventually EBIT.
The honest version uses net revenue — what landed in your bank after VAT and card fees, not gross at the till. A "75% gross margin on gross revenue" with 19% VAT and 1,5% card fees is more like a 67% margin on net. See gross vs net revenue for the full unpack.
The formula and a worked example
Gross profit = Net revenue - COGS
Gross margin % = (Net revenue - COGS) / Net revenue × 100A boutique in Salzburg sells €12.500 of clothing in a month. VAT (20%) takes €2.083, card fees (1,4% on the 85% of sales paid by card) take €149. Net revenue: €10.268. COGS for the month (wholesale cost of garments actually sold): €5.340.
| Step | Calculation | Result |
|---|---|---|
| Gross revenue | — | €12.500 |
| Less VAT (20%) | 12.500 / 1,20 | €10.417 |
| Less card fees on 85% × 10.417 | 85% × 10.417 × 1,4% | −€124 |
| Net revenue | — | €10.293 |
| COGS | — | €5.340 |
| Gross profit | 10.293 − 5.340 | €4.953 |
| Gross margin % | 4.953 / 10.293 | 48,1% |
A boutique owner who quotes "60% margin" by dividing gross profit by gross revenue is overstating the real number by 12 points. The number that lines up with the bank is the one computed on net revenue.
Healthy benchmarks by sector
| Sector | Healthy gross margin band | What a low number signals |
|---|---|---|
| Cafe | 70 - 75% | Below 65%: milk waste, theft, or supplier-cost drift not passed through. |
| Restaurant | 60 - 68% | Below 55%: portion control or menu-mix problem; expensive items selling, profitable ones not. |
| Boutique retail | 45 - 55% | Below 40%: too much markdown or wholesale cost creep. |
| Salon (services) | 80 - 88% | Below 75%: product cost on colour/treatments running hot, or stylist commission is being mislabelled as COGS. |
| Small e-commerce | 40 - 60% | Below 35%: shipping-in cost not in COGS, or platform fees not separated from advertising spend. |
| Bakery | 55 - 65% | Below 50%: ingredient cost spike not yet priced through, or wastage exceeding 8%. |
These bands assume a single-location owner-operator. Multi-location and chain economics differ — central kitchens, bulk purchasing and house brands push the numbers higher. The right benchmark for your shop is your own last 12 months, not the table above. The table is a sanity check for whether you are roughly where you should be.
Why it matters for daily P&L
Gross margin is the leading indicator that breaks before EBIT does. A cafe drifting from 72% to 68% over six weeks will see EBIT collapse roughly three months after that — when the operating costs that were comfortably covered at 72% suddenly are not at 68%. Watching gross margin weekly catches the drift while it is still cheap to fix.
It is also the cleanest signal for two diagnoses that look identical on the surface. A salon with falling EBIT and stable gross margin has an operating-cost problem (rent went up, new hire under-utilized). A salon with falling EBIT and falling gross margin has a pricing or supplier problem (colour cost up, services not repriced). Same EBIT slide, two different fixes. Without gross margin in view, owners often spend on the wrong one.
For the version that pairs gross margin with operating costs to land on EBIT, see operating margin vs net margin. For the cost-side mechanics, see the COGS snapshot.
Related concepts
- Gross vs net revenue — the denominator that decides which margin number is real.
- Operating margin vs net margin — the two ratios below gross margin.
- COGS snapshot — why the cost side has to be a frozen value, not a live lookup.
- Markup vs margin — the conversion every shop owner should be able to do in their head.
FAQ
What is a good gross margin for a small business?
It depends on the sector. Cafe: 70-75%. Restaurant: 60-68%. Boutique retail: 45-55%. Salon services: 80-88%. E-commerce: 40-60%. Bakery: 55-65%. The right benchmark for you is your own last 12 months. A two-point slide over three months is a real problem; a one-point monthly swing is noise.
Should I compute gross margin on gross or net revenue?
Net revenue. VAT was never yours — you collect it for the state. Card fees were never yours — they go to the processor. A "60% gross margin on gross revenue" is closer to 48-50% on net for a typical VAT-paying card-heavy shop. The honest number is the one that lines up with your bank balance.
Does gross margin include staff costs?
No. Gross margin is revenue minus COGS only. Staff wages (except commission directly tied to a sale in some salon models) sit below the gross-profit line in operating costs. A salon owner who folds stylist commission into COGS will get a misleadingly low gross margin and a misleadingly high operating margin. Keep the categories clean.
Why is my gross margin different from what my POS shows?
Most POS dashboards compute margin on gross revenue and use a current restock cost for COGS — both of which inflate the number. The honest version uses net revenue (after VAT and card fees) and a COGS snapshot frozen at the moment of sale. See the COGS snapshot for the mechanics.