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Gross profit margin is the first profitability metric investors and operators look at. It measures how much revenue remains after accounting for the direct costs of production — before sales, marketing, G&A, and other operating expenses.
Gross profit formulas
Gross Profit = Revenue − COGS Gross Margin % = Gross Profit / Revenue × 100 Markup % = Gross Profit / COGS × 100
Note: gross margin and markup are different. A 50% markup means you sell at 1.5× cost, giving a 33% gross margin — not 50%.
Industry gross margin benchmarks
| Industry | Typical Gross Margin |
|---|---|
| SaaS / software | 70–85% |
| Professional services | 60–75% |
| E-commerce / retail | 20–50% |
| Food & beverage | 30–50% |
| Manufacturing | 20–40% |
| Construction | 15–25% |
Why gross margin matters for SaaS
Investors use gross margin to assess scalability. A SaaS business with 80% gross margin can fund sales and marketing from gross profit; a 50% gross margin business struggles to reach Rule of 40 territory without tight cost discipline.
Gross margin vs. net margin
Gross margin excludes operating expenses (sales, marketing, R&D, G&A). Net margin is after all expenses and taxes. A company can have a high gross margin but a negative net margin if operating costs are excessive.