Gross Profit Margin Explained: Formula, Industry Benchmarks & How to Improve It (2026)

August 17, 2026 4 Min Read

Gross profit margin shows how much of every sales dollar a business keeps after covering the direct cost of making or supplying what it sold. Sell a product for $100 that costs $60 to make, and the gross profit margin is 40%.

It’s one of the fastest ways to check whether a business’s pricing and production costs work together, before overheads, tax, or anything else even enters the picture.

Quick Answer

Gross profit margin equals (Revenue − Cost of Goods Sold) ÷ Revenue, expressed as a percentage. A healthy figure depends heavily on industry — construction often sits at 15–35%, while software and professional services can run 55–85%. There’s no single fixed target.

How to Calculate Gross Profit Margin

The formula:

Gross Profit Margin = (Revenue − Cost of Goods Sold) ÷ Revenue × 100

Say a business brings in $250,000 in revenue for the year, with $150,000 in cost of goods sold — the direct costs of making or supplying what was sold. Gross profit is $100,000. Divide that by revenue: $100,000 ÷ $250,000 = 0.40, or 40%.

Cost of goods sold covers materials, direct labour, and make costs tied straight to what was sold. It doesn’t include rent, marketing, office pay, or other overhead. Those come out later, when working out net profit margin instead.

Gross Profit Margin vs. Net Profit Margin

These two get mixed up often, but they measure different things.

Gross profit margin looks only at revenue minus the direct cost of what was sold.
Net profit margin subtracts everything — overhead, interest, tax, and all other costs — to show what’s left as profit.

A business can have a strong gross margin and still run at a loss overall, if overheads eat up everything gross profit brought in. Both numbers matter. They just answer different questions.

What’s a Good Gross Profit Margin?

There’s no single healthy number, since cost structures vary enormously by industry. Rough Australian benchmarks:

Industry	Typical Gross Margin
SaaS & software	70–85%
Professional services	55–70%
Hospitality (food & beverage)	60–68%
IT services & consulting	50–65%
Healthcare & allied health	50–65%
Marketing & creative agencies	45–60%
Trades (plumbing, electrical)	40–55%
Retail (physical goods)	30–55%
Manufacturing	25–40%
Construction & builders	15–35%

A 25% gross margin would be strong for a builder and worrying for a consulting firm. Compare against businesses in the same field, then, rather than chasing a generic target that doesn’t fit your cost setup.

Why Gross Profit Margin Matters

Gross profit margin is often the first number a lender, investor, or accountant checks. It shows whether the base pricing model works before anything else gets added on top. A thin or shrinking margin often means one of two things. Either prices sit too low, or costs have crept up and pricing hasn’t caught up yet.

Margin and sales volume both matter, too. Size counts. A lower margin on high revenue can still bring in more profit dollars than a high margin on a small sales base. Tracking margin as a trend over 12–24 months tells you more about business health than any single month’s figure.

How to Improve a Low Gross Profit Margin

A handful of practical levers exist:

Raise prices, even a little. Small increases flow almost straight to gross profit if sales volume holds steady.
Negotiate with suppliers, especially for high-volume materials or repeat buys.
Cut waste on the shop floor, whether that’s offcuts, rework, or slow steps.
Review your product or service mix. Some offerings carry far better margins than others, and shifting sales mix toward them lifts the blended average.
Automate repetitive direct-labour tasks where it genuinely reduces cost per unit.

Common Mistakes

A few misreads happen often:

Comparing margin across industries. A 30% margin means something completely different for a builder than a software company.
Mixing up gross and net margin. A healthy gross margin doesn’t mean the business is profitable overall, once overheads are counted.
Sorting costs the wrong way. Putting overhead into cost of goods sold (or the reverse) throws off the number and makes it useless for comparison.
Reacting to one bad month. A single dip matters far less than a sustained downward trend.

FAQ

What is a good gross profit margin?
It depends heavily on industry — anywhere from 15–35% for construction to 70–85% for software. Compare against your own field, not a generic benchmark.

How do you calculate gross profit margin?
Subtract cost of goods sold from revenue, then divide by revenue. Multiply by 100 to get a percentage.

What’s the difference between gross profit margin and net profit margin?
Gross margin only accounts for the direct cost of what was sold. Net margin subtracts every expense, including overhead, interest, and tax.

Why is my gross profit margin low?
Usually either prices are too low relative to production costs, or costs have risen without a matching price adjustment. Comparing your margin against industry benchmarks helps identify which.

Does a high gross profit margin guarantee you’re profitable?
No. A business can have a strong gross margin and still lose money overall if overhead costs run too high next to that gross profit.

Should I track gross profit margin monthly?
Tracking it regularly helps, but a single month means less than the trend across 12–24 months, since one-off costs or sales can skew a single period.