---
title: "What is gross margin?"
description: "Gross Margin explained in plain English: definition, how it works, an example, and how it appears in QuickBooks and Xero."
url: https://ledgerbpo.com/glossary/gross-margin/
updated: 2026-09-11
publisher: LedgerBPO (SS Support Network LLC)
language: en-US
---

# What is gross margin?

Glossary

Gross margin is the percentage of revenue a business keeps after subtracting the direct cost of producing its goods or services, known as cost of goods sold. It shows how efficiently a business turns sales into profit before overhead costs.

Updated September 2026

## How gross margin works

Gross margin is calculated by subtracting cost of goods sold from revenue to get gross profit, then dividing gross profit by revenue and expressing it as a percentage. It only accounts for direct costs, like materials and labor tied to production, not overhead expenses like rent or marketing. Different industries carry very different typical gross margins, so comparisons are most useful within the same type of business.

Businesses track gross margin over time and compare it against industry norms to judge pricing and cost control. A shrinking gross margin can signal rising material costs, discounting, or inefficient production, even if total revenue is growing. It is one of the first numbers reviewed when profitability starts to slip. Businesses sometimes calculate gross margin by product line or service type to see which offerings are actually the most profitable.

## Example

A furniture maker earns $200,000 in revenue and spends $120,000 on materials and direct labor, its cost of goods sold. Gross profit is $200,000 minus $120,000, which is $80,000. Gross margin is $80,000 divided by $200,000, which equals 40 percent. The business keeps 40 cents of every revenue dollar before covering overhead.

## Gross margin in QuickBooks Online vs Xero

QuickBooks Online calculates gross profit and gross margin automatically on the Profit and loss report once cost of goods sold accounts are set up correctly. Xero shows the same figures on its Profit and loss report, with gross profit broken out as a subtotal above operating expenses. Getting cost of goods sold accounts set up correctly from the start is essential, since a miscoded expense can distort the margin figure significantly.

## Related terms

- [Net income](https://ledgerbpo.com/glossary/net-income/)
- [COGS](https://ledgerbpo.com/glossary/cogs/)
- [Income Statement](https://ledgerbpo.com/glossary/income-statement/)
- [All terms](https://ledgerbpo.com/glossary/)

## How LedgerBPO handles gross margin

We track your gross margin every month and flag it when it drifts from your normal range, so pricing or cost problems get caught early. A dedicated accountant makes sure cost of goods sold is coded correctly so the margin figure is accurate. You get a reliable read on core profitability, not just top-line revenue. We break gross margin down by product or service line when that level of detail is useful to your business.

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