Gross Margin
What is Gross Margin?
Gross margin is the share of revenue left after subtracting the cost of goods sold (COGS) — the direct materials and direct labor that delivering the work consumed. The formula is gross margin = (revenue − COGS) ÷ revenue, usually expressed as a percent. It measures how profitable the work itself is before any overhead, marketing, or owner pay is taken out. Because it stops at COGS, gross margin is not the same as operating or net margin, which subtract rent, admin, and other indirect costs further down the income statement. For a service operator it is the first read on whether jobs are priced above what they cost to perform.
Gross margin answers a narrow but essential question: once you pay for the materials and the hands that did the job, how much of each dollar of revenue is still yours? Everything else a business spends — trucks, insurance, office, advertising, your own salary — has to come out of that remaining slice, so a thin gross margin leaves little room for the rest.
Because it isolates direct cost, gross margin is the cleanest signal that pricing is sound. If it sags, the cause is usually one of three things: prices set too low, material costs that crept up without a matching price change, or labor running over the hours a job was quoted at. Each has a different fix, so it is worth watching margin by job type rather than only in aggregate.
Keep the boundary clean. Gross margin uses COGS alone; fold overhead in and you are measuring operating margin instead. Track gross margin to judge the work itself, and the lower lines of the income statement to judge the whole business. Improving it starts with getting your direct costs and your pricing method right — and because a markup added onto cost is not the same as the margin it produces, it helps to convert between the two figures before you settle on a quote.