Gross margin
Gross margin is the share of revenue left after the cost of goods sold, calculated as revenue minus COGS, divided by revenue, expressed as a percentage. Ecommerce operators use it to judge whether the product itself is priced and sourced well enough to fund everything else the business has to pay for.
| Variable | What it covers |
|---|---|
| Revenue | Net revenue - gross sales minus discounts, returns and refunds. |
| COGS | The direct cost of the goods sold. For ecommerce, use landed COGS - unit cost plus freight-in plus duty - not the supplier invoice alone. |
Gross margin computed on landed COGS is the same number as CM1, the first rung of the contribution margin step-down taught on The Math.
Worked example
Example numbers. On supplier invoice cost alone (A$88,000) the same month would report 64.8% - the missing A$17,000 of freight-in and duty is 6.8 points of margin that every downstream number would inherit.
What is a good gross margin?
Category structure decides most of it, so no universal target is honest. Heavy, low-priced goods cannot carry the gross margin of light, premium ones; returns-prone categories give margin back after the sale; and the cost basis matters - the same store reads points higher on supplier cost than on landed cost. The better question is what your gross margin has to fund: fulfilment, payment fees, marketing, overheads and profit all live below it.
Keep the arithmetic honest with the free margin vs markup calculator, then follow The Math to see what your gross margin has to survive on the way to contribution.
Gross margin vs related metrics
| Metric | What comes out of revenue | The question it answers |
|---|---|---|
| CM1 | Landed COGS only. | The same number when COGS is landed - CM1 makes the cost basis explicit. |
| Contribution margin | Every variable cost: COGS, fulfilment, fees, variable marketing. | Does the next order make money? |
| Net margin | Every cost, fixed overheads included. | Does the whole business make money? |
| Landed COGS | Not a margin - the cost base gross margin should be built on. | What does a sellable unit truly cost? |
Common mistakes
- Confusing margin with markup. A 50% markup on cost is a 33.3% margin on price; pricing from the wrong one quietly wrecks the plan.
- Booking COGS at supplier cost. Freight-in and duty are product cost; without them gross margin overstates, and so does everything computed from it.
- Computing on gross revenue. Discounts, returns and refunds come off revenue first.
- Budgeting ads from gross margin. It overstates the cushion - the ad dollar spends from contribution margin before marketing, not from gross margin.
- Benchmarking across categories. An apparel gross margin means nothing to a consumables brand; compare against your own history and your own floor.
Gross margin FAQ
Related
Blufire S2 Unit Economics rebuilds gross margin on true landed cost for every order, customer and SKU in the Profitability Cube and the CM waterfall & bridge. The Math teaches the full step-down free.
Updated July 2026