The gross margin of a business is the total sales revenue minus the cost of goods sold, divided by the total sales revenue, and is usually expressed as a percentage. A business that makes widgets for £6 each and sells them for £9 has a gross margin of 33.3 per cent, for example.
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Gross Margins vs. Net Margins
The gross margin refers to the margin before the other costs of doing business, and reflects only the cost of acquiring the goods to be sold. When all other expenses from employee costs to inventory costs to cost of the sales venue and insurance are figured in as well as the cost of the goods to be sold, then you have your net margin (usually much smaller).
Typical Gross Margins for Different Industries
The gross margins for a few representative industries are: health care, 91 per cent; banking, 91 per cent; telecommunications, 86 per cent; renting/leasing, 81 per cent; publishing, 77 per cent; insurance, 70 per cent; advertising, 70 per cent; clothing stores, 48 per cent; hardware stores, 36 per cent; food/beverage stores, 28 per cent; gas stations, 11 per cent.
Retail Gross Margins Are Lower
Gross margins are typically significantly lower at retail businesses compared with manufacturing, service or consultancy businesses. This is partly because retailers are at the end of the product chain and partly because many retailers do a very large volume of business, which allows them to make a profit even with lower gross margins.
Example 1 - Simple Gross Margin Calculation for a Retail Business
Let's say your comic book shop sold £13,000 worth of comics and paperback books last month, and the total cost of those comics and books was £6,500. Your gross margin was 50 per cent for that month (20,000-10,000/20,000 = 50).
Example 2 - More Complex Gross Margin Calculations
Let's say you wanted to know how much your gross margin was on comic books vs. paperback books. You sold £9,750 worth of comics and £3,250 worth of paperbacks ($20,000 total). The comics cost you £5,200 and the paperbacks cost you £1,300 ($10,000 total). So your gross margin on the comics was 46.6 per cent (15,000 - 8,000/15,000 = 46.6), and your gross margin on the paperbacks was 60 per cent ($5,000 - 2,000/5,000 = 60).
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