Sustained profitability and business growth may be your primary goals, but to achieve these you’ll need a consistently healthy gross profit margin.
In this article, you’ll see how to calculate your gross profit margin, how to distinguish it from similar terms and how to use it in practice.
You’ll also learn the two ways to improve your gross profit margin and see what tools you can use to enhance productivity, minimise manual errors and gain real-time insights into your finances. When you get to know your gross profit margin, you’ll be able to better understand the performance of your digital commerce business and assess its scalability.
Gross profit margin is a profitability ratio that shows the percentage of revenue (or net sales) that exceeds the cost of goods sold (COGS).
Not to be confused with gross profit, which is the absolute amount of profit in money terms (Revenue - COGS), gross profit margin is an important indicator of key areas of your business, such as efficiency, cost management and pricing strategy.
For your business to be profitable, stable and sustainable, you need revenue to cover your production costs and facilitate ongoing product development. Your gross profit margin is a reflection of this financial health. We’ll look more closely at how to use gross profit margin later.
The formula for calculating gross profit margin is:
Gross Profit Margin = (Gross Profit / Revenue) x 100
To fully understand and calculate the formula for gross profit margin, you also need to understand COGS:
COGS includes all the direct production and delivery costs of your goods and services, such as:
COGS doesn’t include indirect costs like general administrative expenses, marketing, research and development, rent and other operating costs.
The term ‘gross margin’ is sometimes used to mean ‘gross profit’. In this case, it’s expressed as an absolute money amount.
But ‘gross margin’ is also sometimes used to mean ‘gross profit margin’. Here, it’s expressed as a percentage. For this meaning, the term ‘gross margin ratio’ is also sometimes used.
Absolute gross profit gives a snapshot of financial performance while gross profit margin provides deeper insights into efficiency, cost management and strategic effectiveness – all needed to properly understand your business’s true financial health.
So, if you see the term ‘gross margin’, you need context to determine what’s actually being referred to. Equally, if you use the term yourself, you need to be careful not to cause any confusion.
Let’s imagine you’re an online retailer with the following financials for the full year:
This means that for every pound you earn in sales revenue, you gain 0.40 EUR in gross profit.
Note that gross profit margin doesn’t give you a complete perspective on your financial health, since it doesn’t include operating expenses, taxes or interest.
Net profit margin is your profitability ratio after all expenses are deducted, including operating expenses, taxes and interest.
This metric provides a more comprehensive view of your overall profitability and financial health.
The formula for calculating net profit margin is:
Net Profit Margin = (Net Profit / Revenue) x 100
Understanding your gross profit margin can give you several benefits that ultimately enhance your decision-making and strategies. We’re going to take a look at how, but first, here are some of the ways you can use gross profit margin.
Different sizes
Gross profit margin allows you to compare the performance of companies or markets, even if they’re very different in size. A larger company or market may have a higher gross profit, but its gross profit margin percentage will help you understand its efficiency relative to its revenue.
Different time periods
With gross profit margin, you can compare different periods of performance. For example, imagine you’re undergoing a period of scaling that’s seen a rise in revenue – if your gross profit margin is getting smaller, it could indicate that growth isn’t sustainable.
Industry comparison
You can compare your gross profit margin to industry averages or competitors, which can help you identify strengths or weaknesses in your operations.
Performance benchmarking
Investors and analysts use gross profit margin to benchmark a company’s performance against its peers. So, if you’re looking for investment, demonstrating a high, stable gross profit margin could make you more attractive.
Product mix
By expanding high-margin products and reevaluating low-margin ones, you can strategically adjust your inventory, marketing and development to improve your profitability and sustainability.
Pricing power
If your margin is high, it indicates you have room to adjust prices without significantly affecting sales volume. On the other hand, a low margin might mean you need to reduce costs and implement improvements in efficiency.
Your gross profit margin is dependent on two key factors:
Therefore, to improve your gross profit margin, you need to:
Remember, since gross profit margin is a ratio figure, simply increasing sales volume won’t have any direct impact on it.
In most competitive markets, a price increase will negatively impact demand unless you can demonstrate increased product value to the customer.
You can do this by:
Lowering the direct costs of producing and distributing your products and services can improve your gross profit margin.
Strategies to help you achieve this include:
How you manage money across multiple platforms and currencies directly affects your production costs and efficiency, and enhances your strategic decision-making.
Juni’s financial tools are tailored for digital commerce businesses to better manage cash flow, streamline processes like media buying and improve productivity with automation.
Here’s an overview of how these solutions can influence your gross profit margin.
Integrations with platforms like Shopify and Amazon simplify multiple processes and allow you to easily manage your inventory and track revenue from one dashboard.
Credit lines and custom controls for virtual cards help you maintain operations without financial strain. Improved liquidity allows for better negotiation with suppliers, improved inventory management and timely fulfilment of orders.
Cashback on card spending directly reduces your expenses and so improves your gross profit margin.
Automated financial reporting helps you make informed strategic decisions. By understanding where you can reduce costs and increase efficiency, you can have more sustainable growth.
Savvy Moves is a digital agency that manages paid media for European B2B SaaS companies. Their lack of automation created bottlenecks, increased the risk of human error and limited their strategic decision-making.
“Before partnering with Juni, we faced two main challenges: having manual accounting processes and no centralised financial oversight. We spent hours manually matching receipts to transactions, as we didn't have a good way to manage our spend.”
Rémon de Muijnck, Co-Founder of Savvy Moves.
By partnering with Juni, Savvy Moves were able to:
“We can create different cards for different purposes, like paying for tools, employee expenses and travel. We also integrate Juni with our traditional bank which helps us have an overview of our financial position.”
Rémon de Muijnck, Co-Founder of Savvy Moves.
Savvy Moves have achieved a consistent 30% quarterly growth rate since their launch last year.
Your gross profit margin is a critical metric in assessing the performance and profitability of your products and services, and reflects the health and sustainability of your business as a whole.
You can use it to benchmark your performance against that of competitors within your industry, to understand how effectively you’ve scaled, and to make strategic choices about pricing and operations.
To improve your gross profit margins and achieve sustainable long-term growth, you need efficient production processes that incorporate automation, streamlined workflows and a real-time view across your inventory and sales.
By implementing these strategies, and by continuously monitoring and adjusting your business practices based on financial insights, you can ensure your business remains competitive, profitable and scalable.
Juni is not a bank – yet. We’re a financial technology company providing e-money services and as such are not part of a deposit guarantee scheme. Learn more about our license and how we keep your business and money safe.
Juni Technology AB (company number 559248-0908) is licensed and registered as an electronic money institution with the Swedish Financial Supervisory Authority (Sw. Finansinspektionen) (license no: 64025). Payment Card Solutions (UK) Limited (company number 05941947) and UAB B4B Payments Europe (company number 305539054) are regulated by the Financial Conduct Authority (ref: 930619) and the Bank of Lithuania (licence no: 76), respectively. The Juni Mastercard Corporate Card is issued by Payment Card Solutions (UK) Limited and UAB B4B Payments Europe pursuant to a license by Mastercard International Incorporated. Mastercard and the circles design are registered trademarks of Mastercard International Incorporated. Juni Technology AB. Masthamnsgatan 21, 413 28 Göteborg, Sweden. © 2025 Juni. All Rights Reserved.
