Gross Margin for Small Business

What is gross margin?

Gross margin is the share of revenue that remains after subtracting the direct costs of producing or delivering your product or service. It shows how much money is left to cover overhead expenses and generate profit.

Simple formula

Gross Margin % = (Revenue − Direct Costs) ÷ Revenue × 100

Direct costs include raw materials, packaging, payment processing fees, shipping, or the cost of subcontracted work directly tied to a sale.

Why it matters

• Shows whether your pricing is high enough to cover all other costs.
• Helps compare products, services, or customer segments.
• Reveals problems early when prices rise or suppliers change.

Practical example

A freelance designer earns €5,000 in a month. Direct costs (software, stock assets, payment fees) total €750. Gross margin = (5,000 − 750) ÷ 5,000 × 100 = 85%. That 85% is what's left to cover rent, taxes, and personal income.

Practical tips

• Track gross margin per product or service, not only overall.
• Review it regularly — at least monthly.
• If margins shrink, check pricing, supplier costs, and waste before cutting overhead.