Gross Margin vs Operating Margin: Key Difference (+Examples)
Table of Contents
Gross margin and operating margin are two key business performance metrics. Though they’re closely related, gross margin vs. operating margin aren’t the same.
Gross margin shows how much profit you keep after covering the cost of goods sold (COGS). Basically, it tells you how profitable your products are before other expenses.
Operating margin goes further, showing how much profit you keep after paying for operating expenses like rent, salaries, and marketing, giving you a clearer view of your business’s overall efficiency.
Here’s a quick look at the table comparing the two metrics:
This guide will dig deeper into what the two metrics are, how to calculate them, how they're used and some industry benchmarks.
Gross Margin vs Operating Margin: Key Differences Breakdown
1. Defintion
Gross margin is the percentage of revenue remaining after deducting the cost of goods sold (COGS). This percentage is often referred to as the gross profit margin and is a key indicator of product-level profitability.
On the other hand, operating margin indicates the percentage of revenue left after deducting both COGS and operating expenses. This metric helps you understand how well your company controls operational costs while staying profitable.
Further Reading
2. Calculation
Gross Margin is calculated by dividing gross profit (revenue minus COGS) by revenue.
For operating margin, take your gross profit and subtract your operating expenses—like rent, salaries, and utilities.
For example, if your business brings in $100,000 in revenue and your cost of goods sold is $60,000, your gross margin would be 40%. If you also have $25,000 in operating expenses, your operating profit would be $15,000, resulting in an operating margin of 15%.
3. Application
Gross margin is used to analyze profitability at the product level, helping you decide whether you need to adjust prices or find more cost-effective suppliers.
Meanwhile, operating margin gives you a broader view of your business’s financial health, showing if your operations are running efficiently enough to support sustainable profit.
Aspects
Gross Margin
Operating Margin
When It Increase
Indicates higher profit per sale after product costs are covered
Indicates the business is retaining more profit after paying for operating expenses
When It Decrease
Suggests rising production costs or prices set too low
Suggest operating expenses are rising faster than sales growth
Profit Impact
Directly impact gross profit
Directly impact operating profit
Action Suggested
Consider adjusting prices, lowering production costs, or negotiating better supplier rates
Review and reduce operating expenses
A higher gross margin means you’re making more profit from each sale after paying for your products. If this metric drops, it flags your costs might be rising or your prices are too low. When that happens, you may need to trim production costs, find better supplier rates, or raise prices to keep your business profitable.
Your operating margin goes higher when your business keeps more profit after paying for day-to-day expenses. Now, if your operating margin starts to drop, it’s a heads-up that your expenses are eating into your profit. Maybe you’ve hired more people, spent more on ads, but your sales don’t grow enough to cover those extra costs.
Further Reading
What is a Good Gross Profit Margin?
A “good” gross profit margin depends on your industry, but generally, the higher, the better—as long as it’s sustainable. Many high profit margin businesses aim for a gross margin between 30% to 50%, while some niches, like luxury products, may see margins above 60%.
Further Reading
What is a Good Operating Profit Margin?
A 10% operating profit margin is average, and 20% is excellent. It shows how much profit you keep after paying for daily business costs. Just remember, high debt can reduce these profits, as interest payments come out of your operating income.
Is Higher Gross Profit Margin Better?
In general, yes—a higher gross profit margin is better because it means you’re keeping more profit from each sale after covering your product costs.
But, a very high margin could mean your prices are too high, which might hurt sales if customers can find similar products for less elsewhere.
Further Reading
Streamline Margins Tracking With Automation
Understanding the difference between gross margin vs operating margin is essential for getting a clear picture of your business's profitability.
While gross margin tells you how efficiently you're producing or sourcing products, operating margin reveals how well you're managing overall operational costs. Both metrics are powerful on their own—but even more valuable when used together to guide pricing, spending, and growth decisions.
If you're looking to track both margins accurately and effortlessly, tools like TrueProfit can automate the process and give you real-time visibility into your profit metrics—so you can focus on scaling with confidence.
Further Reading
Gross Margin vs Operating Margin FAQs
What is the difference between op and GP?
Operating profit (op) is the profit left after paying for operating expenses like rent, salaries, and marketing, while gross profit (GP) is the profit left after covering the cost of goods sold (COGS) but before operating expenses.
What is the difference between GM and OM?
Gross margin (GM) shows how much profit you make from sales after covering product costs, while operating margin (OM) shows how much profit you keep after paying for operating expenses as well.
What is the difference between Ros and OM?
Return on Sales (ROS) and Operating Margin (OM) are similar, both measuring how much profit you keep from revenue, but ROS often uses net profit, while OM uses operating profit, which excludes interest and taxes.
What is the difference between gross and net margin?
Gross margin measures profit after product costs, while net margin measures profit after all expenses, including operating costs, interest, and taxes.
What is the difference between operating profit and GP?
Operating profit is what remains after paying operating expenses from gross profit, while gross profit is what remains after subtracting COGS from revenue.
Is higher GP better?
Yes, a higher gross profit generally means you are making more money from each sale after paying for your products, which is good for your business as long as it’s sustainable.
Is operating margin the same as gross margin?
No, operating margin is not the same as gross margin. Gross margin only considers product costs, while operating margin also accounts for operating expenses.
What's the difference between GP and GM?
Gross profit (GP) is a dollar amount showing profit after product costs, while gross margin (GM) is that profit expressed as a percentage of revenue.
Is EBIT the same as operating margin?
EBIT (Earnings Before Interest and Taxes) is similar to operating profit in dollar terms, while operating margin expresses operating profit as a percentage of revenue.
Is EBITDA margin the same as gross margin?
No, EBITDA margin and gross margin are different. Gross margin looks at profit after product costs, while EBITDA margin shows profit before interest, taxes, depreciation, and amortization, including the impact of operating expenses.
Content Executive at TrueProfit & eCommerce Content Specialist
Leah Tran is a Content Specialist at TrueProfit, where she crafts SEO-driven and data-backed content to help eCommerce merchants understand their true profitability. With a strong background in content writing, research, and editorial content, she focuses on making complex financial and business concepts clear, engaging, and actionable for Shopify merchants.
