The two margins and what they diagnose
Gross margin = (revenue − cost of goods) ÷ revenue. It isolates production economics: what it costs to make or buy the thing you sell. A weak gross margin cannot be fixed with leaner overheads; the product economics themselves are the problem.
Net margin = (gross profit − operating expenses) ÷ revenue. This is the bottom line after rent, salaries, marketing and software. A healthy gross margin with a weak net margin points to overheads, not the product.
What good looks like
Benchmarks vary enormously by industry. Software businesses commonly run 70 to 90% gross margins, restaurants 60 to 70%, retail 25 to 50%, and groceries in the single digits on net margin. Comparing your margins to your own history and your direct competitors is far more meaningful than any universal number.
Direction matters more than level. A margin that shrinks quarter after quarter is an early warning that pricing power is eroding or costs are creeping, and it deserves attention long before profit turns negative.
Frequently asked questions
What is the difference between margin and markup?
Margin is profit as a share of the selling price; markup is profit as a share of cost. A 100% markup equals a 50% margin. Our markup calculator converts between them.
What goes into cost of goods sold?
Direct costs of producing what you sell: materials, manufacturing, freight-in, and direct labour. For retail, the wholesale cost of inventory sold.
What counts as operating expenses?
Overheads not tied to a unit of production: rent, salaries, marketing, software, insurance, utilities and professional fees.
Is this before or after tax?
Before tax. Net margin after tax subtracts income taxes as well, which vary by jurisdiction and structure.
What is a good net margin?
It varies by industry, from 2 to 3% in groceries to 20%+ in software. Compare against your sector and your own trend rather than a universal figure.
My gross margin is fine but net is negative. What now?
Your product economics work but overheads are too heavy for current volume. Either grow revenue over the same fixed base or cut operating costs.