Gross Profit Margin: Definition, Formula, Example & More!
- What exactly is the gross profit margin?
- How do you calculate it?
- Why should you track it?
- How does it differ from net profit margin or operating margin?
- Assess Pricing Strategy: Ensure that your product prices are high enough to cover costs while remaining competitive.
- Control Costs: Identify rising COGS and take action, such as negotiating with suppliers or optimizing production.
- Measure Efficiency: Understand how efficiently your business produces goods compared to revenue generation.
- Increase Prices: Carefully raise prices to boost margins without losing customers.
- Reduce Costs: Cut expenses by negotiating with suppliers, minimizing waste, and optimizing inventory.
- Enhance Efficiency: Streamline operations and automate tasks to reduce labor costs and increase productivity.
- Focus on High-Margin Products: Promote high-margin items and reconsider low-margin offerings.
- Ignore Other Expenses: It only considers revenue and COGS, overlooking other costs like marketing, R&D, and overheads. A high gross margin doesn’t always mean high net profit.
- Impact of Inflation and Deflation: Changes in COGS due to inflation or deflation can affect gross profit margins, making comparisons over time less reliable.
- Limited Financial Insight: It provides a snapshot of profitability but doesn’t account for cash flow, debt, or investments in assets.
- Gross Profit Margin (GPM): Shows the percentage of revenue left after deducting the cost of goods sold (COGS).
- It measures product or service profitability.
- Operating Profit Margin (OPM): Indicates the percentage of revenue left after subtracting operating expenses like rent, utilities, and salaries.
- It reflects the profitability of core business operations.
- Net Profit Margin (NPM): Represents the percentage of revenue remaining after all expenses, including taxes and interest, are deducted.
- It offers a complete view of overall profitability.
Irene Le
Content Manager at TrueProfit & eCommerce Marketing Specialist
Irene Le is the Content Manager at TrueProfit, specializing in crafting insightful, data-driven content to help eCommerce merchants scale profitably. With over 5 years of experience in content creation and growth strategy for the eCommerce industry, she is dedicated to producing high-value, actionable content that empowers merchants to make informed financial decisions.
