In plain words
Gross margin is revenue minus the cost of goods sold, usually stated as a percentage of revenue. It is the margin on an income statement, and the one most brands quote for a product.
It answers a pricing question, whether a product is priced well above what it costs to make or buy. It does not answer an offer question, because the costs an offer moves, such as shipping, picks and card fees, sit below the gross margin line.
Formula
- Gross margin = revenue − cost of goods sold
- Gross margin % = gross margin ÷ revenue
Worked example
The same $40.00 bag with a $12.00 unit cost has a gross margin of $28.00, or 70.0%. The engine gives that figure when every cost except the product's is set to zero.
With fulfilment, shipping, fees and the refund reserve included, the same order keeps $15.36 (38.4%). That is its contribution margin.
The example order
A $40.00 bag of coffee, shipped free, every cost counted
2 declared kinds cost nothing on this option
| Step | Grain | Amount |
|---|---|---|
| Revenue | – | $40.00 |
| cogs | per unit | −$12.00 |
| pick_pack | per order | −$1.18 |
| packaging | per parcel | −$0.50 |
| shipping | per parcel | −$7.50 |
| processing_fixed | per order | −$0.30 |
| refunds | percent | −$2.00 |
| processing | percent | −$1.16 |
| Gross margin | – | $15.36 |
| 2 kinds costing nothing | – | $0.00 |
Computed by the margin engine in Offer Suite's own code, in whole cents, from a $40.00 bag of coffee with a $12.00 unit cost.
Gross margin is not what an offer earns
A free-shipping offer, a gift or a bundle can move contribution margin a lot and gross margin not at all. Brands that set discounts from gross margin tend to give away more than they meant to. A 30% discount looks safe against a 70% gross margin and can wipe out most of a 38% contribution margin.
Using it
Use gross margin to check a product's price against its cost, and to compare products with each other. Stop using it once the question is about an offer: a discount, a bundle, a gift or a shipping rule. At that point switch to contribution margin per order, and keep gross margin only as a ceiling on what any offer could earn.