What Is the Difference Between Gross and Net Profit Margin?
The Short Answer
Gross margin measures profit after direct costs (COGS) while net margin measures profit after all expenses including overhead, taxes, and interest. A business might have 60% gross margin but only 10% net margin.
The Detailed Breakdown
Gross margin uses only COGS; net margin subtracts all expenses including operating costs, taxes, and interest.
| Calculation | Value | Assumptions |
|---|---|---|
| Gross Profit Margin | 60% | ($100K - $40K COGS) / $100K revenue |
| Net Profit Margin | 10% | ($100K - $90K total expenses) / $100K revenue |
| Operating Expenses | $50,000 | Total expenses minus COGS ($90K - $40K) |
Key Assumptions
- Gross margin = (Revenue - COGS) / Revenue.
- Net margin = (Revenue - All Expenses) / Revenue.
- Operating expenses include rent, salaries, marketing, and utilities.
Adjust for Your Situation
Track both margins: gross margin validates your pricing, net margin shows your true profitability.
Use the Free CalculatorWhat Affects This Result
Industry
Software companies often have 80%+ gross margins; retail has 25-50%.
Scale
Operating expenses often grow slower than revenue, improving net margin at scale.
Pricing Strategy
Premium pricing improves gross margin but may reduce volume.