Gross Margin
(Sale price - COGS) / sale price × 100. The basis for every pricing and advertising decision.
In practice
Gross margin sets the 'advertising ceiling.' A 30% margin on a $55 AOV equals $16.50 gross profit. A CPA above $16.50 means a loss.
Common misconception
'A 50% margin means a good business.' If advertising is 40%, salaries 12%, and rent 8% — that's 60% in expenses, meaning a 50% margin still results in a loss.
How to fix it
Low gross margin? (1) lower COGS, (2) review pricing, (3) mix — are low-margin products selling more? (4) digital products carry an 80%+ margin.
Example
A fitness store: 28% margin. Bundling products with a digital guide raised margin to 41%. They pushed the bundle in ads.
Priority
Calculate gross margin by product today. 20% of products are subsidizing the other 80%.
Related terms
Keep learning. Metrics that touch the same area:
- Pricing StrategyFinanceThe strategy for setting a product's price. Types: Cost-Plus (cost + markup), Value-Based (what it's worth to the customer), Competitive (market-based), Penetration (low price to break in), Premium (high price to differentiate).
- ROI – Return on InvestmentFinanceA general profitability metric: (net profit / investment cost) × 100. Different from ROAS — it includes all expenses.
- AOV – Average Order ValueFinanceTotal revenue divided by number of orders. The biggest lever for increasing revenue without more advertising.
- LTV / CLV – Customer Lifetime ValueFinanceTotal expected profit from a customer over the entire relationship. A healthy LTV:CAC ratio is 3:1.
- COGS – Cost of Goods SoldFinanceThe direct cost of producing or acquiring products sold. Includes: product + import shipping + customs + packaging.
- Cash FlowFinanceThe movement of cash in the business. 'Profitable on paper, broke in the bank' — a common problem in growing stores.
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