Gross Margin
Gross Margin is the percentage of revenue left after subtracting the direct costs of producing goods or services. If you sell a product for $100 and it costs $40 to produce, your gross margin is 60%. Healthy gross margins enable investment in growth, talent, and innovation.
What Is Gross Margin?
Gross Margin = (Revenue - Cost of Goods Sold) / Revenue. It's a profitability metric that reveals how efficiently you produce what you sell. High margin businesses (SaaS, consulting) scale easily because each additional sale contributes directly to profit. Low margin businesses (retail, manufacturing) require high volume to be profitable. Plura's software model has high margins because serving additional customers doesn't require proportional cost increases.
Gross Margin vs. Net Margin
Don't confuse these:
- Gross Margin: Revenue minus direct production costs
- Operating Margin: Gross margin minus operating expenses (salaries, rent, marketing)
- Net Margin: Operating margin minus taxes and interest (true bottom-line profit)
- Importance: Healthy gross margin is necessary but not sufficient for profitability
Why Gross Margin Matters for Business Strategy
Gross margin determines your pricing power and growth runway. If your margin is 80%, you can invest 40% in sales/marketing while maintaining 40% net profit. If your margin is 20%, you need to cut costs aggressively or raise prices. Margin also guides product strategy—high-margin products fund growth in low-margin segments.
Improving Gross Margin
Organizations improve margin through:
- Operational Efficiency: Automate repetitive tasks, reduce waste, streamline processes
- Pricing Strategy: Raise prices on high-demand products; discontinue low-margin offerings
- Scale: As you grow, fixed costs are spread across more units, improving margin
- Product Mix: Emphasize high-margin products in your sales/marketing
FAQs related to
Gross Margin
What's a healthy gross margin?
Industry-dependent: SaaS (70-80%), Services (50-60%), Retail (30-40%), Manufacturing (25-35%). Compare against competitors. If your margin is 10% below industry average, something is wrong.
How does automation improve margins?
Automation reduces variable costs—the per-unit expense decreases as volume increases. AI agents handling customer interactions cost less per interaction than human agents, improving overall margin. Automation is a gross margin accelerator.
Should I raise prices to improve margin?
Maybe. Test it. A 10% price increase on 100 customers earning $100 margin each = $100k more profit (if volume stays flat). But volume rarely stays flat—some customers leave. The net impact depends on price elasticity of demand.
What if my margin is declining?
First, investigate cause: Are input costs rising? Are you discounting to compete? Is product mix shifting toward lower-margin items? Once you identify the cause, address it through pricing, cost reduction, or product strategy changes.
How do I know if my pricing is right?
Watch your gross margin. If it's 5-10% above the industry average, you're probably underpriced. If it's 20%+ above, you may have pricing power to increase. Competitive analysis and customer feedback also inform pricing strategy.