How to Calculate Weighted Gross Profit Percentage
A professional tool to determine your true profit margin across multiple product lines.
Formula: (Total Gross Profit / Total Revenue) × 100
Breakdown by Product Line
| Product | Revenue Share | Margin % | Contribution to WGP% |
|---|
What is Weighted Gross Profit Percentage?
Learning how to calculate weighted gross profit percentage is essential for any business that sells more than one product or service. Unlike a simple average, which treats every product line equally, the weighted gross profit percentage accounts for the fact that different products contribute differently to your total revenue.
For example, if you sell a high-volume product with a low margin and a low-volume product with a high margin, a simple average of their margins would be misleading. The weighted gross profit percentage gives you a true "blended" margin that reflects the actual profitability of your entire sales mix.
This metric is critical for CFOs, financial analysts, and business owners who need to understand the impact of sales mix changes on the bottom line. It answers the question: "If I sell more of Product A and less of Product B, what happens to my overall company profitability?"
Weighted Gross Profit Percentage Formula
The mathematical foundation for how to calculate weighted gross profit percentage relies on determining the total gross profit dollars first, then dividing by total revenue.
The Core Formula:
Weighted GP % = (Total Gross Profit ($) / Total Revenue ($)) × 100
Alternatively, it can be calculated by summing the weighted contributions of each product:
Weighted GP % = Σ (Product Revenue Share % × Product Margin %)
Variable Definitions
| Variable | Meaning | Unit | Typical Range |
|---|---|---|---|
| Total Revenue | Sum of sales from all products | Currency ($) | > 0 |
| Gross Profit ($) | Revenue minus Cost of Goods Sold (COGS) | Currency ($) | Usually > 0 |
| Sales Mix | The percentage of total revenue a specific product represents | Percentage (%) | 0% – 100% |
| Margin | Individual product profitability | Percentage (%) | -100% to 100% |
Practical Examples (Real-World Use Cases)
Example 1: The Hardware Store
Consider a hardware store selling Power Tools and Nails.
- Power Tools: $80,000 Revenue at 15% Margin. (Profit = $12,000)
- Nails: $20,000 Revenue at 60% Margin. (Profit = $12,000)
Simple Average: (15% + 60%) / 2 = 37.5%. This is incorrect.
Weighted Calculation:
Total Revenue = $100,000
Total Profit = $24,000
Weighted GP % = ($24,000 / $100,000) = 24%.
The true margin is much lower than the simple average because the low-margin Power Tools dominate the revenue.
Example 2: Software Company (SaaS vs. Services)
A tech company sells Subscriptions and Consulting.
- Subscriptions: $500,000 Revenue at 90% Margin.
- Consulting: $500,000 Revenue at 40% Margin.
Since revenue is split 50/50, the weighted average is exactly in the middle: 65%. If the company shifts focus to sell $800,000 in Subscriptions and only $200,000 in Consulting, the weighted margin would rise significantly, even if individual product margins stay the same.
How to Use This Weighted Gross Profit Calculator
- Enter Product Names: Label your categories (e.g., "Hardware", "Software") for clarity.
- Input Revenue: Enter the total sales revenue for each specific product line.
- Input Margin: Enter the gross margin percentage for that specific line. If you only have COGS, calculate margin first as (Revenue – COGS) / Revenue.
- Review Results: The calculator instantly updates the "Weighted Gross Profit Percentage".
- Analyze the Chart: Look at the bar chart to see which product contributes the most to your actual profit dollars.
Key Factors That Affect Weighted Gross Profit Results
Understanding how to calculate weighted gross profit percentage requires analyzing the factors that shift the needle.
- Sales Mix Variance: Selling more of a low-margin product will dilute your overall percentage, even if total revenue grows.
- Cost of Goods Sold (COGS): Increases in raw material costs for your primary product will have a disproportionate impact on the weighted average compared to secondary products.
- Pricing Strategy: Discounting a high-volume item affects the weighted margin more severely than discounting a niche item.
- Seasonality: Seasonal shifts might change the sales mix (e.g., selling more low-margin gift cards in December), temporarily lowering the weighted margin.
- Inventory Waste: Spoilage or obsolescence reduces the effective margin of specific lines, dragging down the weighted total.
- Economies of Scale: As volume increases for one product, its individual margin might improve due to lower unit costs, boosting the overall weighted average.
Frequently Asked Questions (FAQ)
This happens when your highest revenue products have the lowest profit margins. The heavy "weight" of the low-margin sales pulls the overall average down.
Yes. If you sell a large volume of products at a loss (negative margin) that outweighs the profit from other items, your overall weighted percentage can be negative.
It is recommended to calculate this monthly. Significant shifts in sales mix can happen quickly, and monitoring this helps in adjusting sales strategies promptly.
No. This calculator focuses on Gross Profit, which is Revenue minus COGS. It does not include rent, salaries, or marketing (Operating Expenses).
This varies by industry. Retail might aim for 30-50%, while SaaS companies often aim for 80%+. The key is consistency and improvement over time.
You can either increase the margin of individual products (raise prices, lower costs) or shift your sales mix to sell more of your high-margin products.
Not exactly. Gross profit deducts COGS. Contribution margin deducts all variable costs (which may include variable selling costs like commissions). However, the weighting logic is similar.
Absolutely. For services, "COGS" is usually the direct labor cost of the people providing the service. The logic remains the same.
Related Tools and Resources
Expand your financial analysis toolkit with these related calculators:
- Gross Margin Calculator – Calculate the margin for a single product.
- Break-Even Point Calculator – Determine sales needed to cover all costs.
- Markup vs Margin Calculator – Understand the difference between markup percentage and margin percentage.
- Operating Profit Margin Calculator – Analyze profitability after operating expenses.
- Sales Mix Variance Calculator – Deep dive into how mix changes affect revenue.
- COGS Calculator – Calculate your Cost of Goods Sold accurately.