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Gross Margin

The share of revenue left after the direct cost of delivering your product or service (cost of goods sold). Software has high gross margins; hardware and delivery-heavy businesses much lower.

Gross margin = (revenue - COGS) / revenue

Why it matters

Gross margin sets the ceiling on how profitable a business can ever be and how much it can spend to acquire customers. It is the first number investors check to judge the quality of a business model.

For example

A SaaS company keeps 85 rupees of every 100 in revenue after hosting and support costs, an 85 percent gross margin; a food-delivery startup might keep only 25.

Go deeper

What is the difference between gross margin and contribution margin? AccountingCoach · article This is the cleanest side-by-side we found: it defines both margins in plain language and then walks the exact same $600,000 sales figure through both formulas, so you see gross margin land at 46.7% and contribution margin at 73.3% on identical numbers. The punchline is the one founders miss: gross margin strips out all product costs (fixed and variable), while contribution margin isolates only the variable costs, which is what actually tells you whether one more sale earns money. Treat it as your starting point for the vocabulary, not the last word on your own P&L. Open accountingcoach.com →

Related terms

Cost of Goods Sold Contribution Margin Unit Economics

Also in Starting Up

See how founders actually handle this on Money, pricing and metrics, part of the Starting Up hub.

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