Understanding Gross vs. Net Margins

Insight 51: Understanding Gross vs. Net Margins

Profitability is key to business survival, and understanding gross and net margins helps in making informed financial decisions.

Key Differences

Gross Margin:

Formula: (Revenue - Cost of Goods Sold) ÷ Revenue × 100

Measures profitability before operational expenses.

High gross margin means efficient production.

Net Margin:

Formula: (Net Profit ÷ Revenue) × 100

Shows actual profit after all expenses, taxes, and operational costs.

A low net margin indicates high overhead or pricing inefficiencies.

How to Improve Margins

Reduce production and supply chain costs.

Optimize pricing strategy to increase revenue.

Lower operational expenses without sacrificing quality.

💡 Example: Apple maintains high margins by controlling production costs while charging premium prices.