Gross Margin vs Net Margin
Two different views of profitability — and what each one really tells you.
Gross margin and net margin both measure profitability, but they answer different questions. Using only one can give you a false sense of how the business is doing.
Gross margin
Gross Margin % = (Revenue − Direct Costs) ÷ Revenue × 100
Shows how profitable each sale is before overhead. Useful for pricing and product mix decisions.
Net margin
Net Margin % = Net Profit ÷ Revenue × 100
Shows how much of every euro of revenue you actually keep after all costs, taxes, and interest.
Why both matter
- Healthy gross margin, low net margin → overhead may be too high.
- Low gross margin → pricing or supplier costs need attention first.
- Both healthy → the business model is working end to end.
Practical example
A bakery has €10,000 revenue, €4,000 direct costs, €5,000 overhead and €200 in taxes. Gross margin = (10,000 − 4,000) ÷ 10,000 = 60%. Net profit = 10,000 − 4,000 − 5,000 − 200 = €800. Net margin = 800 ÷ 10,000 = 8%. Pricing is fine; overhead is eating most of the profit.
How to interpret
- Compare margins to your own past months, not random industry numbers.
- A small change in margin can mean a large change in profit.
Next steps
- Calculate both margins monthly.
- If they move in opposite directions, find out which cost changed.
Open the Profitability calculator →
This guide is for educational and planning purposes only. It is not accounting, tax, legal, investment, or financial advice.