Gross Margin is revenue minus cost of goods sold (COGS), expressed as a percentage of revenue: the share of each sales dollar left after paying the direct costs of producing and delivering what was sold.
Gross margin sits near the top of the 📝Income Statement. Revenue less cost of goods sold equals gross profit, and gross profit divided by revenue equals gross margin; the dollar figure is gross profit and the percentage is gross margin, though the terms are often used interchangeably. A company with a 60% gross margin keeps 60 cents of every revenue dollar to cover operating expenses, interest, taxes, and profit. Expressing every line of the income statement this way produces a 📝Marginal Income Statement, where gross margin is followed by operating margin and net margin.
What counts as COGS determines the number. A narrow definition includes only product cost. A realized gross margin, the version used in 📝LTV:CAC analysis, also loads in fully landed product costs, fulfillment, merchant processing fees, inventory shrinkage, returns processing, discounting, and sell-through. Costs that rise with sales but sit outside COGS are 📝Other Variable Overheads; subtracting those and marketing spend moves the analysis from gross margin to 📝Contribution Margin. Gross margin is also the multiplier that turns lifetime revenue into 📝Lifetime Gross Profit (LTGP), a core input to 📝Unit Economics.
The gross margin I trust is the realized one. Landed cost, fulfillment, merchant fees, shrinkage, returns, and discounting all belong in COGS before the number tells you anything about the customer.