What is gross margin?
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 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.
Common mistakes
- Computing gross margin on gross revenue instead of net. A shop that divides gross profit by the number on the till is including VAT and card fees it never got to keep, which inflates the margin by 8-15 points and hides a pricing problem until the bank balance disagrees.
- Using today's restock cost for COGS instead of the cost at the moment of sale. When your supplier raises prices, the honest margin on stock you already sold used the old, lower cost — pricing the sold units at the new cost either overstates or understates the real margin depending on which way the cost moved.
- Folding staff wages into COGS. Gross margin is revenue minus the direct cost of goods only; a salon owner who buries stylist commission in COGS gets a scary-low gross margin and a flattering operating margin, and then fixes the wrong thing.
- Reacting to one month of movement. A single point of monthly swing is normal noise — supplier timing, product mix, a slow week. Only a sustained slide over three months or more is a real pricing or supplier signal worth acting on.
- Judging your shop against a chain's benchmark. Central kitchens, house brands and bulk buying give chains a structural margin edge you cannot match. Your only fair benchmark is your own trailing 12 months.
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.
How it shows up in your daily P&L
In nouz, gross margin falls straight out of the same numbers that build your daily EBIT. The day starts with gross revenue; nouz subtracts VAT and the card fee on the electronic share to land on net revenue. Net revenue minus the COGS snapshot — the frozen cost of exactly what sold that day — is your gross profit, and dividing that by net revenue gives the gross margin for the day. Because both the revenue and the cost are the honest, after-tax-after-fees versions, the margin you read on your phone at close is the one that will still be true when the accounts are finalised.
That is why gross margin is the first thing to check when a day's EBIT looks off. EBIT is gross profit minus variable costs minus the daily slice of your fixed costs, so a soft EBIT can come from either the margin side or the cost side. If gross margin held steady but EBIT fell, the leak is downstream in variable or fixed costs. If gross margin itself dropped, the sale prices or the COGS snapshots moved — and nouz shows you both, day by day, before a soft week hardens into a soft quarter.
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.
Common questions
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.
How often should I check my gross margin?
Weekly is enough to catch drift while it is still cheap to fix, and it smooths out the day-to-day noise from product mix and supplier timing. Daily is useful right after a price change or a supplier switch, when you want to confirm the new numbers landed the way you planned. The one cadence that fails is once a year at tax time — by then a slide has already cost you a full year of thinner profit.
Is gross margin the same as contribution margin?
No. Gross margin deducts only COGS. Contribution margin deducts all variable costs — COGS plus packaging, card fees and shipping — so it is always equal to or lower than gross margin. Gross margin tells you whether pricing covers the cost of goods; contribution margin tells you how much each sale leaves toward fixed costs. See contribution margin for the distinction.
My gross margin is fine but I have no money at the end of the month — why?
A healthy gross margin only means your pricing covers the cost of goods. Everything else — rent, wages, your own salary, software, insurance — is paid out of what is left, and if that cost base is sized for a bigger business than yours, a great gross margin still ends in an empty account. That is an operating-cost problem, not a pricing one. See operating margin vs net margin to separate the two.