Gross Margin
Marge brute in French
Quick definition
Gross margin is the percentage of revenue left after paying the direct cost of the goods or services you sold. It shows how much of each sales dollar survives to cover everything else in the business.
What gross margin measures
The formula is simple: (revenue minus cost of goods sold) divided by revenue. If your shop brings in $200,000 in sales and the goods you sold cost $120,000 to buy or produce, your gross profit is $80,000 and your gross margin is 40%.
Cost of goods sold, usually shortened to COGS, is the direct cost of whatever you sell: materials, inventory purchases, direct labour, freight to get product in the door, subcontractors on a specific job. These are mostly variable costs because they rise and fall with sales volume.
Gross margin vs. markup: the classic mix-up
Markup and margin use the same two numbers but divide by different things, and mixing them up quietly shrinks your profit. Markup is measured against cost. Margin is measured against selling price.
Say an item costs you $30 and you apply a 50% markup. You sell it for $45. Your gross profit is $15, but $15 divided by the $45 price is a 33% margin, not 50%. To actually earn a 50% margin on a $30 cost, you would need to sell at $60, which is a 100% markup.
The trap: an owner decides the business needs a 50% margin to work, sets prices with a 50% markup, and ends up 17 points short without ever seeing why. When you set prices, be clear about which number you are using.
What belongs in COGS, and what does not
Only direct costs belong in cost of goods sold: costs you would not have incurred if that specific sale had not happened. Rent, insurance, office salaries, software, marketing and accounting fees are overhead. They matter enormously, but they live below the gross profit line.
Keeping the split clean is not just bookkeeping tidiness. If overhead leaks into COGS, your gross margin looks worse than it is and you may raise prices for the wrong reason. If direct costs leak into overhead, your margin looks healthy while every sale quietly loses money.
Why gross margin matters so much
Gross margin funds everything below it. Rent, wages, loan payments, your own income and the net profit margin at the bottom all have to come out of gross profit. A business with a thin gross margin has almost no room for overhead or mistakes, no matter how strong its sales are.
It is also where pricing decisions live. A small price increase usually flows almost entirely into gross profit, while a discount comes almost entirely out of it. And it feeds directly into your break-even point: the thinner the margin, the more you must sell just to cover fixed costs.
One caution: margin norms differ wildly between industries. Generally speaking, tracking your own gross margin over time, month by month and product by product, tells you far more than comparing your number to a business in a different line of work.
In Canada
For Canadian small businesses, GST/HST collected on sales is not revenue and GST/HST paid on inputs is usually recoverable, so both should be excluded when you calculate margin. Sole proprietors will recognize the structure from form T2125, which starts with gross sales, deducts cost of goods sold to reach gross profit, then deducts expenses. If you import inventory, exchange-rate swings on the Canadian dollar flow straight into your COGS, so a margin that drifts down may reflect currency, not pricing.
Worked example
Priya runs a small garden centre. Last year she sold $300,000 of plants and supplies that cost her $180,000 to buy and ship in, for a gross profit of $120,000 and a gross margin of 40%. Out of that $120,000 she paid $90,000 of rent, wages and other overhead, leaving $30,000 before tax. When her supplier raised prices, her margin slipped to 36% and her profit fell by almost half. The margin line warned her months before the bottom line made it obvious, and a modest price adjustment restored it.
Related terms
Reviewed by Alexandre Bernier, CFP®, CIM®, PFP®·Updated August 2026