To calculate gross margin, subtract the cost of goods sold (COGS) from net sales, divide the result by net sales and multiply by 100. The answer is the percentage of each sale you keep after paying the direct cost of what you sold.
Shopify writes the formula as gross margin = ((net sales - COGS) / net sales) x 100, and CFI writes the same ratio as (revenue - COGS) / revenue. Shopify's Q4 2025 survey found 42% of merchants cite ensuring profitability as their top business goal, and gross margin helps explain why profit comes in higher or lower than expected. The dollar figures below are the sources' own examples, as of October 2026.
The two numbers you need
Net sales are your gross sales after deducting returns, allowances and discounts. COGS is the direct cost of producing or buying the goods you sold in the period. You'll find both on your profit and loss statement, which is also called an income statement. If you don't have one yet, start with this profit and loss statement template.
Getting COGS right is where most calculations go wrong. Shopify lists what belongs in it and what doesn't, while noting that exact classifications vary by business and accounting method:
| Counts as COGS | Doesn't count as COGS |
|---|---|
| Wholesale product costs | Marketing costs |
| Raw materials | Administrative salaries |
| Direct production labour | Office rent and utilities |
| Inbound freight and import duties | Interest payments |
| Packaging needed to prepare products for sale | Income taxes |
Worked example: a dishware company's quarter
Shopify's example is a dishware company with $27,000 in net sales for the quarter and $10,000 in COGS:
- Find gross profit: $27,000 - $10,000 = $17,000.
- Divide gross profit by net sales: $17,000 / $27,000 = 0.6296.
- Multiply by 100: 0.6296 x 100 = 62.96%.
- Round it: a gross margin of about 63%.
In plain terms, 63 cents of every dollar of net sales is left after paying for the dishes themselves. That 63 cents has to cover everything else the business spends, and whatever remains is profit.
A second check with CFI's numbers
CFI runs the same ratio on a sample income statement with revenue of 102,007 and COGS of 39,023:
- Subtract COGS from revenue: 102,007 - 39,023 = 62,984.
- Divide by revenue: 62,984 / 102,007 = 0.6174.
- Multiply by 100: a gross margin of 61.74%.
CFI reads that as $0.3826 of every dollar going to COGS and $0.6174 left over for expenses, taxes and the rest. Its simpler illustration: at a 20% gross margin, you keep $0.20 of each dollar and $0.80 goes to COGS.
In a spreadsheet, put net sales in one cell and COGS in the next, then divide the difference by net sales and format the result as a percentage. Do it per product as well as for the whole business, because a strong overall figure can hide one product that barely covers its own cost.
What your gross margin tells you
Gross profit and gross margin come from the same figures. Shopify's distinction is that gross profit is a currency amount and gross margin is a percentage of net sales, which is what makes products or periods with different sales totals comparable. That comparison is where the number earns its keep:
- Growth can hide a problem. Shopify's example: quarterly gross profit rises from $100,000 to $120,000 while gross margin falls from 40% to 32%. More sales, but each sale became less profitable, usually from rising product costs or heavier discounting.
- It prices your growth plans. At a 40% gross margin, an extra $10,000 in net sales brings in about $4,000 of gross profit, if costs and sales mix stay similar. Compare that with what it would cost to win those sales.
- Small moves add up. At $1 million in net sales, raising gross margin from 40% to 41% adds $10,000 in gross profit.
Gross margin only covers COGS. Shopify's illustration is a retailer with a 63% gross margin and a 10% net margin once every other expense is paid. I've set out that difference in currency terms in gross profit vs net profit, and if you price by adding a percentage to cost, read markup vs margin before you set any targets, because the two percentages aren't interchangeable.
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Is your gross margin good? Compare within your industry
CFI says a low gross margin doesn't necessarily mean a company is performing badly. Compare businesses in the same industry, not across industries. A legal services firm has a high ratio because its production costs are low, while a car manufacturer's is lower because its production costs are high. CFI's numbers make the point: McDonald's had a gross margin of 41.4% at the end of 2016 and Bank of America 97.8%, and comparing the two tells you nothing useful.
Shopify quotes NYU Stern's January 2026 averages for US public companies:
| Industry | Average gross margin |
|---|---|
| Retail (grocery and food) | 26.31% |
| Retail distributors | 30.57% |
| General retail | 33.18% |
| Specialty retail | 35.3% |
| Apparel | 56.88% |
Public companies buy and operate at a different scale from a small online shop, so treat these as context, not a target. A better target comes from your own costs. Shopify's example: if operating expenses are 25% of sales and you want a 10% operating margin, you need a gross margin of at least 35%.
The two levers that move it
CFI and Shopify agree that most improvements come from two places: raising prices or lowering COGS. Buying inventory more cheaply, through purchase discounts or a less expensive supplier, lifts the ratio. So does charging more, though CFI warns it has to stay competitive or fewer customers will buy. Shopify adds two more: shift your sales mix towards higher-margin products, and set a minimum acceptable margin before you run any discount.
My take
Use gross margin to decide what to charge and where to buy. Work it out per product, not just for the whole business, and check it every quarter. If gross profit is growing but the percentage is slipping, stop and find out why before you spend more chasing sales.
Frequently asked questions
What is the formula for gross margin?
Gross margin = (net sales - COGS) / net sales x 100. CFI writes the same ratio as (revenue - COGS) / revenue.
What is an example of a gross margin calculation?
In Shopify's example, $27,000 in net sales minus $10,000 in COGS leaves $17,000 of gross profit. $17,000 divided by $27,000 is 0.6296, or a gross margin of about 63%.
What is included in COGS?
Shopify lists wholesale product costs, raw materials, direct production labour, inbound freight and import duties, and packaging needed to prepare products for sale.
What is a good gross margin?
It depends on your industry. CFI says to compare companies in the same industry, and NYU Stern's January 2026 averages range from 26.31% for grocery retail to 56.88% for apparel.
