Financial
Gross Margin
Gross Margin represents the difference between revenue and the cost of goods sold (COGS), expressed as a percentage of revenue. It measures how efficiently a company uses labor and supplies in producing goods or services.
HOW TO MEASURE
Gross Margin is calculated by subtracting the COGS from total revenue and then dividing the result by total revenue. It highlights the percentage of revenue that exceeds the direct costs of producing the goods or services sold.
HOW TO IMPROVE
Reduce Direct Costs: Negotiate better terms with suppliers or improve production efficiency to lower COGS.
Increase Product Prices: Adjust pricing strategies to reflect the value offered, balancing competitiveness and profitability.
Enhance Product Quality: Improve product quality to justify higher prices and increase customer satisfaction.
Streamline Operations: Optimize production or service delivery processes to reduce waste and costs.
FORMULA
Gross Margin=(Revenue - COGS/Revenue )×100%
EXAMPLE
A software company generates $200,000 in revenue from software sales and incurs $50,000 in direct costs (like server costs, direct labor, and license fees). The gross margin would be: ($200,000−$50,000/$200,000)×100%=75%
DEPARTMENT USAGE
Leadership: Uses gross margin to assess product profitability and overall business efficiency.
Product: Determines if product costs are aligned with the market and if there's a need for cost optimization.
Finance: Relies on gross margin for financial health assessment and pricing strategies.
Sales: Uses gross margin data to understand the profitability of different products and guide sales strategies.
Operations: Monitors and manages production or service delivery costs to maximize gross margin.
Gross margin is critical for assessing the profitability of products and guiding strategic decisions across multiple departments.
View the collection of Metrics Workshops.