This is useful for choosing where to concentrate your marketing efforts.ĭon’t panic if you discover low margins. You can look at the gross margin of specific products to see which ones bring in the most profit. It’s often helpful to look deeper than just the overall GPM of the company. Mahesh Vellanki, former principal at Redpoint Ventures, put it: “ is a proxy for the profit potential of a business.” Frequent changes might mean your expenses are changing more often than they should be, or that your sales aren’t steady.Ī higher gross profit margin means a lower ratio of COGS to total revenue, which, in turn, means a higher potential for profit. Your gross profit margin should be fairly steady (unless you’re making major changes to your business model). You could then analyze and improve the production process to lower your costs. If you have a low GPM, that may mean your COGS is too high. Gross profit margin signals whether your sales and production processes are running efficiently. Raw materials and packaging are examples of variable costs. Variable costs that change as production ramps up or down. Labor costs are part of COGS, for example. COGS is what it directly costs the company to make a product. The two factors that determine gross profit margin are revenue and cost of goods sold (COGS). Gross profit margin (GPM) is the percentage of revenue that is actual profit before adjusting for operating costs, such as marketing, overhead, and salaries. Gross Profit Margin What is Gross Profit Margin?
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