Formula
Gross Profit Margin = (Revenue – Cost of Goods Sold) ÷ Revenue × 100
Calculation Example
If a company has $500,000 in revenue and $300,000 in COGS, the gross profit margin is: ((500,000 – 300,000) ÷ 500,000) × 100 = 40%
Data Source
Financial statements, income statements, accounting records
Tracking Frequency
Monthly, Quarterly, Annually
Optimal Value
Higher is better, varies by industry (typically above 40% for software, 10-20% for retail).
Minimum Acceptable Value
Depends on industry; a very low margin may indicate high costs or pricing issues.
Benchmark
Industry-specific: software ~70-80%, manufacturing ~25-35%, retail ~10-20%
Recommended Chart Type
Bar chart (to compare across products/periods), Line chart (for trends over time)
How It Appears in Reports
Usually expressed as a percentage in financial reports comparing past periods.
Why Is This KPI Important?
Shows profitability before operating expenses, helps businesses price products effectively.
Typical Problems and Limitations
Does not account for operating expenses, taxes, or interest. Can be misleading if costs are not allocated correctly.
Actions for Poor Results
Reduce production costs, negotiate better supplier contracts, increase prices strategically.
Related KPIs
Net Profit Margin, Revenue, Cost of Goods Sold (COGS)
Real-Life Examples
A retail company improved gross margin by switching suppliers, reducing COGS by 10% and increasing profitability.
Most Common Mistakes
Ignoring hidden production costs, using incorrect revenue/COGS values, comparing to irrelevant benchmarks.
