Gross margin
Gross margin sets the ceiling on everything else. A business at a thin margin has to run on volume and precision; one at a wide margin can afford to experiment.
gross margin = (revenue - cost of goods) / revenue
What belongs in cost of goods
Purchase price, inbound freight, import duties and any handling that is required before the item can be sold. Outbound shipping and payment fees are usually kept below the line so that the margin remains comparable across channels.
Whatever the choice, it has to be consistent. A margin measured differently between two years tells nothing about either.
Reading the level
| Level | Typical model | Consequence |
|---|---|---|
| Thin | Reselling branded goods, marketplace-led | Volume and cost control decide the outcome |
| Middle | Mixed range with some exclusivity | Room for paid acquisition on repeat customers |
| Wide | Own brand, private label, digital products | Marketing can be bought, mistakes are survivable |
Where margin leaks
- Discount codes applied at checkout but not deducted in reporting
- Returns booked as a cost line rather than against the sale
- Free shipping thresholds set below the point where the order still contributes
- Stock written down late, so the margin looks better than it was