Gross Margin Ratio Formula and How To Calculate It

Gross margin ratio measures the percentage of sales revenue left after a business subtracts its cost of goods sold (COGS). It provides a way to assess pricing, production costs, and product profitability.

A business can generate substantial sales revenue while retaining little of it as gross profit. Gross margin ratio puts those figures into context by showing how much revenue remains after COGS. Learn how to calculate gross margin ratio, interpret the result, and use it to evaluate a company’s financial performance.

What is gross margin ratio?

Gross margin ratio is the percentage of net sales remaining after subtracting cost of goods sold. It helps business owners assess pricing and operational efficiency.

Gross profit is a dollar amount, while gross margin ratio is a percentage. If a business earns $40,000 in gross profit on $100,000 in net sales, its gross margin ratio is 40%.

How to calculate the gross margin ratio

Calculate gross margin ratio in four steps. Use net sales and COGS from the same accounting period so the result reflects a consistent set of transactions.

1. Determine net sales

Net sales are gross sales minus returns, discounts, and allowances. Use net sales rather than gross sales because returned or discounted purchases don’t provide the full listed selling price.

2. Calculate cost of goods sold

COGS covers costs assigned to producing or purchasing the goods sold during the period. 

For a retailer, it includes the purchase cost of sold inventory. For a manufacturer, it can include raw materials, labor, and factory overhead. Marketing, administration, and income taxes aren’t part of COGS. Raw materials are often variable costs, meaning the total expense rises or falls with production volume.

For small businesses calculating COGS on Schedule C, the IRS instructs taxpayers to add beginning inventory, purchases, labor, materials and supplies, and other eligible costs, then subtract ending inventory. 

Note that different inventory rules may apply to some small business taxpayers. Review the IRS instructions for calculating COGS for details.

Use this formula: 

COGS = Beginning inventory + Purchases + Labor + Materials and supplies + Other costs − Ending inventory

Shopify store owners can record each product or variant’s cost in the Cost per item field on the product details page. Shopify uses that figure to display projected profit and margin and to calculate profit reporting.

3. Find gross profit

Subtract COGS from net sales. The result is gross profit in dollars.

Gross profit = Net sales − COGS

Gross profit appears on a profit and loss statement after COGS and before operating expenses.

4. Calculate the gross margin ratio

Divide gross profit by net sales. Multiply the result by 100 to express the ratio as a percentage.

Gross margin ratio = (Net sales − COGS) / Net sales x 100

Gross margin ratio example

Suppose a shoe company reports $28.7 million in net sales and $19.248 million in COGS for its sneakers. 

First, subtract COGS from net sales:

$28,700,000 − $19,248,000 = $9,452,000 in gross profit

Next, divide gross profit by net sales and multiply by 100:

($9,452,000 / $28,700,000) x 100 = 32.9%

The company’s gross margin ratio is 32.9%. It retains about 33¢ from each sales dollar after COGS. That money remains available for other business expenses and profit.

For a quick estimate, enter the selling price and item cost into Shopify’s free profit margin calculator. Before setting a price, review markup versus margin, since markup is based on product cost while margin is based on the selling price.

Gross margin vs. operating margin vs. net profit margin

Gross margin, operating margin, and net profit margin measure profitability at different stages of an income statement. Each metric shows how much revenue remains after subtracting a different set of expenses:

• Gross margin only subtracts COGS. 
• Operating margin accounts for marketing, rent, and administrative expenses. 
• Net profit margin includes every expense, including interest and taxes.

The table below gives an overview of the differences between these ratios. 

Gross profit, operating income, and net income are dollar amounts. Their corresponding margins express those amounts as percentages of net sales. 

Comparing the three margins

Return to the shoe company with $28.7 million in net sales and $19.248 million in COGS. Its gross profit is $9.452 million.

Gross margin = ($28.7 million − $19.248 million) / $28.7 million x 100 = 32.9%

Suppose the company also spends $2.8 million on marketing, rent, and administrative payroll. Subtracting those expenses leaves $6.652 million in operating income.

Operating margin = ($9.452 million − $2.8 million) / $28.7 million x 100 = 23.2%

The company then records $1.5 million in interest, taxes, and other non-operating expenses. Its net income falls to $5.152 million.

Net profit margin = ($6.652 million − $1.5 million) / $28.7 million x 100 = 18%

The three ratios offer different views of the same company:

• Gross margin focuses on product costs and pricing. 
• Operating margin measures the profitability of its core business. 
• Net profit margin shows how much income remains after every expense.

What makes a “good” gross margin ratio?

A good gross margin ratio leaves enough revenue to cover operating expenses and produce net income. The right target depends on the industry and business model.

For example, financial companies account for costs differently from product businesses. A regional bank’s gross margin isn’t a useful benchmark for an apparel store or grocery retailer.

NYU Stern data from January 2026 reports the following averages for US companies:

High gross margins don’t guarantee high net margins. Apparel companies in the dataset averaged a 56.88% gross margin but only a 3.85% net margin. Expenses such as marketing, rent, interest, and taxes can reduce the income left after COGS.

Compare your margin with businesses that sell similar products, then track how it changes over time. A falling margin could mean supplier costs have increased or discounts have become too aggressive. On the other hand, a rising margin can reflect better pricing or lower product costs.

Gross margin example: Steve Madden

Steve Madden reported $2.534 billion in total revenue and $1.049 billion in gross profit for 2025. Its gross margin was 41.4%, according to the company’s 2025 Form 10-K.

Gross margin varied by sales channel. Steve Madden’s direct-to-consumer segment recorded a 58.4% gross margin. Its wholesale footwear segment recorded 33.5%.

The company’s total gross margin increased from 41% in 2024. Steve Madden attributed the increase to a greater share of higher-margin direct-to-consumer revenue. Tariff costs reduced part of that gain.

The results show why a single industry threshold can’t define a good gross margin. Historical trends, sales channels, and cost changes provide needed context.

How to increase your gross margin ratio

Improving gross margin means increasing net sales per item, lowering COGS, or doing both. Revenue can rise while margins fall, so sales figures alone don’t provide enough information.

In the Shopify Survey of Store Owners from Q4 2025,* 77% of store owners said they track sales or total revenue. It was the most commonly tracked metric. 

Fewer than half track profit margin, traffic, average order value, or conversion rate.

Use the following tips to increase your gross margin ratio:

• Track margin at the product level
• Review your pricing
• Reduce product costs
• Compare margins with sales volumes
• Limit unnecessary discounts and refunds

Track margin at the product level

Shopify’s profit reports break down gross profit and gross margin by product, product variant SKU, or POS location. 

The gross margin column uses the following calculation:

Gross margin = [(net sales − cost) / net sales] x 100

Shopify reports profit only for products or variants that had a cost per item recorded when they were sold. Keep those costs up to date, then review the reports for products with high sales but low margins. 

Note that discounts and refunds affect gross margin, because the report uses net sales.

Review your pricing

A price increase raises gross margin when product costs remain steady, but it may reduce the quantity customers buy.

In a Deloitte survey of 330 global retail executives conducted in late 2025, 73% said they intended to gradually adjust retail prices upward.

Calculate how a potential price change would affect gross margin before changing prices. A product sold for $50 with a $30 cost has a 40% gross margin. Raising the price to $55 increases the margin to 45.5%, assuming the cost stays at $30.

But a higher margin of sale doesn’t necessarily produce the best overall result. Michael Petry, creative director and partner at Golden West Boots, says businesses sometimes need to choose between margin and value.

“You have to pick lanes and you have to sort of pick your poison at certain points, a lot of times in terms of margin versus volume,” he says.’”Maybe sometimes that’ll push you into a price point that doesn’t get you the volume.”

Reduce product costs

Lower COGS improves gross margin without requiring customers to pay more. A retailer could negotiate a lower unit price by committing to a larger supplier order. But remember, a cheaper supplier may not save money if lower quality leads to more returns.

When considering a larger production run, calculate marginal cost, or the added expense of producing one more unit. Compare that cost with the expected selling price before increasing output.

Compare margin with sales volume

Two products can generate the same revenue but contribute different amounts of gross profit. 

Compare margins by product and variant, then identify which items combine higher margins with meaningful sales volume.

Review lower-margin variants alongside their sales volume and total gross profit before changing their price or removing them.

Limit unnecessary discounts and refunds

Discounts reduce net sales while product costs stay the same. Frequent storewide promotions can therefore shrink gross margin quickly.

Look closely at discounts by product to identify offers that reduce net sales and gross margin. Review refund patterns by SKU to find products with higher refund activity. 

*Based on a 2025 survey of 500 Shopify merchants conducted in English across Australia, Canada, the United Kingdom, Ireland, New Zealand, and the United States. Respondents were established merchants with two or more years on the platform. Results reflect the experiences of this specific sample and may not be representative of all merchants.