Gross Margin Formula: The Complete
Profit Margin Guide
Master the gross margin formula with step-by-step examples, margin vs markup conversions, and pricing strategies.
The Gross Margin Formula
Also written as: (Gross Profit ÷ Revenue) × 100
The total selling price of goods sold. Also called sales or net sales.
Cost of Goods Sold—all direct costs to produce or acquire the products sold.
A percentage showing what portion of revenue is gross profit.
Quick Example
You sell a product for $80 and it costs you $32 (including all COGS).
Gross Margin = (($80 - $32) ÷ $80) × 100 = 60%
60% of each sale is gross profit; 40% goes to cover product costs.
Calculate Margins Automatically
StoreRadar calculates gross margin for every product in your WooCommerce store—no spreadsheets required.
Gross Margin Formula Variations
Different ways to calculate and express profit margins
The standard margin formula. Express as a percentage for easy comparison.
The dollar amount before margin percentage is calculated.
How much you add to cost. Always higher than margin for same profit.
Useful when you know markup and need margin.
Useful when you know margin and need to calculate prices.
Includes shipping, payment fees, and other per-order costs.
Margin vs Markup Conversion Table
They're not the same—here's how they relate
Margin
Profit as a % of selling price
"I sell for $100, cost is $60, margin is 40%"
$40 ÷ $100 = 40%
Markup
Profit as a % of cost
"I pay $60, add $40, markup is 66.7%"
$40 ÷ $60 = 66.7%
| Margin | Markup | Price from $100 Cost |
|---|---|---|
| 20% | 25% | $100 cost → $125 price |
| 25% | 33.3% | $100 cost → $133.33 price |
| 30% | 42.9% | $100 cost → $142.86 price |
| 33.3% | 50% | $100 cost → $150 price |
| 40% | 66.7% | $100 cost → $166.67 price |
| 50% | 100% | $100 cost → $200 price |
| 60% | 150% | $100 cost → $250 price |
| 70% | 233% | $100 cost → $333.33 price |
Key Insight: 50% Margin = 100% Markup
At 50% margin, you double your cost (100% markup). This is often the break-even point for many retail businesses after accounting for operating expenses and advertising costs.
Worked Examples
Step-by-step margin calculations
Basic Gross Margin Calculation
You sell a product for $79.99. Your wholesale cost is $32, and packaging costs $3 per unit.
- 1 Calculate COGS: $32 + $3 = $35
- 2 Calculate Gross Profit: $79.99 - $35 = $44.99
- 3 Calculate Gross Margin: ($44.99 ÷ $79.99) × 100
- 4 Gross Margin = 56.2%
Your gross margin is 56.2% per unit.
This is a healthy margin for ecommerce. You keep $44.99 from each $79.99 sale before operating expenses.
Store-Wide Gross Margin
Last month your store generated $85,000 in revenue. Total COGS was $47,600.
- 1 Calculate Gross Profit: $85,000 - $47,600 = $37,400
- 2 Calculate Gross Margin: ($37,400 ÷ $85,000) × 100
- 3 Gross Margin = 44.0%
Your store's overall gross margin is 44%.
44% margin is solid. You have $37,400 to cover operating expenses, marketing, and profit.
Converting Margin to Markup
You want to achieve a 40% gross margin on a product that costs you $25. What price should you set?
- 1 Convert margin to markup: 0.40 ÷ (1 - 0.40) = 0.667 (66.7%)
- 2 Calculate price: $25 × (1 + 0.667) = $25 × 1.667
- 3 Price = $41.67
- 4 Verify: ($41.67 - $25) ÷ $41.67 = 40% ✓
Price the product at $41.67 to achieve 40% margin.
A 40% margin requires a 66.7% markup. Many confuse these—a 40% markup only gives you 28.6% margin.
Comparing Product Margins
Compare margins across your product line to identify winners and losers.
- 1 Product A: $120 price, $48 cost → ($72 ÷ $120) × 100 = 60%
- 2 Product B: $45 price, $22 cost → ($23 ÷ $45) × 100 = 51%
- 3 Product C: $200 price, $140 cost → ($60 ÷ $200) × 100 = 30%
- 4 Weighted average: (0.60×40% + 0.51×35% + 0.30×25%) = 49.4%
Product A has 60% margin (best), Product C has 30% margin (lowest).
Product C drags down your average. Consider price increases, cost reduction, or discontinuing if volume is low.
Gross Margin Benchmarks by Business Model
What margins are typical for your type of ecommerce?
| Business Model | Typical Margin | Notes |
|---|---|---|
| Dropshipping | 15% - 30% | Low margins, high volume model |
| Print on Demand | 20% - 35% | Production costs eat into margin |
| Wholesale/Reselling | 30% - 50% | Depends on supplier relationships |
| Private Label | 50% - 70% | Higher margins, more control |
| Handmade/Artisan | 50% - 80% | Labor intensive but high margins |
| Digital Products | 80% - 95% | Minimal COGS after creation |
| SaaS/Subscriptions | 70% - 90% | High margins, recurring revenue |
Note: These are typical ranges. Your specific margin depends on product sourcing, pricing strategy, and operational efficiency.
Common Margin Calculation Mistakes
Errors that lead to incorrect pricing and profitability
Confusing Margin with Markup
Thinking a 50% markup gives you 50% margin. A 50% markup only produces a 33.3% margin.
Use the conversion formulas. Margin = Markup ÷ (1 + Markup). A 100% markup = 50% margin.
Forgetting Hidden COGS
Only counting wholesale cost and ignoring packaging, inbound shipping, customs, and handling.
Include all direct costs: product cost + inbound freight + duties + packaging + any per-unit handling.
Including Operating Expenses in COGS
Adding marketing, rent, or salaries to COGS. These belong in operating expenses, not COGS.
COGS = direct product costs only. Operating expenses are subtracted from gross profit to get net profit.
Using Margin to Set Prices
Trying to add margin directly to cost. If cost is $50 and you want 40% margin, you can't just add $20.
Price = Cost ÷ (1 - Desired Margin). For 40% margin: $50 ÷ 0.60 = $83.33
Ignoring Shipping Costs
Not accounting for shipping in margin calculations, especially for free shipping offers.
Calculate contribution margin including shipping costs. Free shipping reduces your effective margin.
Averaging Margins Wrong
Simple average of product margins ignores sales volume. Product with 20% margin but 80% of sales dominates.
Use revenue-weighted average: Σ(Margin × Revenue Share) for each product.
How to Improve Your Gross Margin
Strategies to increase profitability
Negotiate Better Supplier Terms
Bulk discounts, better payment terms, or finding alternative suppliers can directly improve margins.
Raise Prices Strategically
A 10% price increase with 5% volume loss often increases total profit. Test price elasticity.
Reduce Packaging Costs
Optimize box sizes, use lighter materials, and negotiate with packaging suppliers.
Optimize Shipping to Warehouse
Consolidate shipments, use freight vs express, and consider closer fulfillment locations.
Cut Low-Margin Products
Discontinue or reprice products dragging down your average margin.
Create Bundles
Bundle lower-margin items with high-margin products to improve overall transaction margin.
How to Track Gross Margin in WooCommerce
Three ways to monitor profit margins for your WooCommerce store
Option 1: Spreadsheets
Export WooCommerce orders and manually calculate margins in Excel or Google Sheets. Time-consuming and error-prone for large catalogs.
- Full control
- No additional cost
- Manual data entry
- No real-time updates
- Easy to make errors
Option 2: WooCommerce Plugins
Various cost-tracking plugins can add COGS fields to products. Quality and features vary significantly between plugins.
- Integrates with WooCommerce
- Varies by plugin
- Plugin quality varies
- Limited reporting
- May conflict with other plugins
Option 3: StoreRadar
Import your COGS data once, and StoreRadar calculates gross margin for every product, order, and customer segment automatically with real-time updates.
- Automatic calculation
- Product-level margins
- Real-time updates
- AI insights
- Monthly subscription
Related Ecommerce Formulas
Other metrics that depend on gross margin
| Formula | Calculation | Relationship to Margin |
|---|---|---|
| Net Profit Margin | ((Revenue - All Costs) ÷ Revenue) × 100 | Gross margin minus operating expenses = net margin |
| Break-Even ROAS | 1 ÷ Gross Margin | Higher margin = lower ROAS needed to be profitable on ads |
| Contribution Margin | ((Revenue - Variable Costs) ÷ Revenue) × 100 | Includes per-order costs beyond COGS (shipping, fees) |
| Gross Profit | Revenue - COGS | The dollar amount used to calculate gross margin percentage |
| Customer Lifetime Value | AOV × Margin × Purchase Frequency × Lifespan | Margin directly impacts how much each customer is worth |
Need help with these calculations?
Frequently Asked Questions
Common questions about gross margin
The gross margin formula is: Gross Margin = ((Revenue - COGS) ÷ Revenue) × 100. For example, if you sell a product for $100 and your cost of goods sold is $60, your gross margin is (($100 - $60) ÷ $100) × 100 = 40%.
Gross profit is a dollar amount (Revenue - COGS), while gross margin is a percentage ((Revenue - COGS) ÷ Revenue × 100). If you have $100,000 revenue and $60,000 COGS, your gross profit is $40,000 and your gross margin is 40%.
Margin is profit as a percentage of selling price; markup is profit as a percentage of cost. A product with 40% margin has 66.7% markup. Formula: Markup = Margin ÷ (1 - Margin). They're different ways of expressing the same profit relationship.
Healthy ecommerce gross margins typically range from 40-60%. Dropshipping often sees 15-30%, while private label products can achieve 50-70%. High margins allow more room for marketing spend and operational costs.
COGS includes all direct costs to produce or acquire products: wholesale cost, manufacturing, shipping to warehouse, packaging materials, and direct labor. It excludes indirect costs like marketing, rent, and software subscriptions.
Gross margin determines your break-even ROAS. With 40% margin, you need 2.5x ROAS to break even (1 ÷ 0.40). Higher margins mean you can be profitable at lower ROAS, giving you more flexibility to scale advertising.
Track Margins Across Every Product
StoreRadar calculates gross margin for every SKU in your catalog, so you can identify your most and least profitable products at a glance.
Start Free Trial ->By signing up, you agree to our Terms of Service and Privacy Policy