Gross Margin Rate Calculator
Calculate your business profitability by determining the percentage of revenue that exceeds the cost of goods sold.
What is Gross Margin Rate?
The Gross Margin Rate (also known as Gross Profit Margin) is a financial metric used to assess a company's financial health and business model by revealing the proportion of money left over from revenues after accounting for the cost of goods sold (COGS). It specifically measures the efficiency of production and pricing.
How to Calculate Gross Margin Rate
To calculate your gross margin rate, follow these three steps:
- Find Gross Profit: Subtract the Cost of Goods Sold (COGS) from your Total Revenue. COGS includes direct costs like raw materials and direct labor.
- Divide by Revenue: Take the Gross Profit result and divide it by the original Total Revenue figure.
- Convert to Percentage: Multiply the decimal result by 100 to get the Gross Margin Rate percentage.
Example Calculation
Imagine a retail store sells a jacket for $100. The store purchased that jacket from a wholesaler for $60.
- Revenue: $100
- COGS: $60
- Gross Profit: $100 – $60 = $40
- Gross Margin Rate: ($40 / $100) x 100 = 40%
Difference Between Margin and Markup
While often confused, margin and markup are different. Margin is the ratio of profit to the sales price, whereas Markup is the ratio of profit to the purchase cost. If you buy an item for $50 and sell it for $100, your markup is 100%, but your gross margin rate is 50%.