gross margin
Gross margin is the percentage of your sales that remains after you subtract the direct cost of making or buying what you sold.
In plain English
Adaeze sells jollof rice and small chops from a stall in Yaba, and one evening she sat down with her notebook trying to work out why she felt busy but broke.
She had sold ₦150,000 worth of food that week, and when she added up rice, chicken, oil, takeaway packs and gas, it came to ₦90,000. That left ₦60,000, and when she divided that by ₦150,000 she got 40%. That 40% is her gross margin, the slice of every sale that is left after paying for the direct ingredients of the thing she sold.
It does not yet cover her shop rent, her helper's wage, transport to the market, or the new fryer she wants to buy. Those come later, out of that ₦60,000. Gross margin only asks one question, out of every ₦100 you brought in, how much survived the cost of the product itself.
A UK example makes it clearer. A small bakery in Manchester sells a cake for £20. The flour, butter, eggs, sugar and box cost £8. Gross margin is £12 out of £20, which is 60%. That 60% is what is left to pay the baker's electricity bill, oven lease and everything else that keeps the business standing.
Businesses watch this number closely because it tells them how healthy their pricing and buying really are, long before rent, salaries or tax enter the conversation. A trader whose gross margin keeps shrinking is either paying too much for supplies or selling too cheap, and no amount of hustle fixes that until the pricing itself is fixed.
A phone accessories seller in Alaba buys a batch of chargers for ₦400,000 and sells them all for ₦640,000. Gross profit is ₦240,000, and gross margin is ₦240,000 divided by ₦640,000, which comes to 37.5%.
Questions people ask
Is gross margin the same as profit?
No. It is only the first layer of profit, before rent, salaries, transport, tax and other running costs are subtracted. What is left after all of that is net profit, a much smaller and more honest number.
What counts as the cost that gets subtracted to find gross margin?
Only the direct cost of the product or service sold, things like raw materials, packaging, the price you paid a supplier, or the labour directly tied to making that item. Rent, marketing and office salaries do not belong here.
What is a good gross margin to aim for?
It depends heavily on the industry. A market trader reselling goods might see 15% to 30%, while a software company or a service business can see 70% or higher, because their direct costs are so much lower than what they charge.
Last reviewed