Definition
Gross margin is gross profit as a percentage of revenue — that is, revenue minus cost of goods, divided by revenue. Sell for €100 with €40 in cost of goods, and gross margin is 60%.
Also called: Gross margin, Margin, Gross MarginFollow the sale through to contribution.
Same revenue. A different contribution margin changes what you can afford to spend.
01Sales value does not tell you how much is left.
Why gross margin governs everything
Gross margin is the base number all the profit-based metrics rest on. It determines your break-even ROAS (1 / margin), how much each order contributes, and how aggressively you can bid in the auction. Two brands with the same revenue but different gross margins have wildly different conditions for scaling.
Note that gross margin (after cost of goods) isn't the same as contribution margin after all variable costs. Shipping, fees and returns are only subtracted at the next layers (CM2, CM3), and they can eat a fair chunk of a handsome gross margin.
Gross margin as a growth lever
A higher gross margin is one of the most underrated growth moves: it lowers your break-even ROAS and raises the ceiling for what you can bid and still make money. Pricing, an assortment mix weighted toward high-margin products and better purchasing terms all pull in that direction.
Precisely because margin propagates all the way up the economics, it's often a stronger lever than chasing cheaper ads: a margin improvement makes every single order more profitable at once.
Frequently asked questions
What's the difference between gross margin and contribution margin?
Gross margin is revenue minus cost of goods (as a percentage). Contribution margin goes further and also subtracts shipping, fees and returns. Gross margin is the first layer; contribution margin is closer to the real profit per order.
How does gross margin affect my ROAS?
Directly: your break-even ROAS is 1 divided by your margin. A higher gross margin lowers break-even and raises the ceiling for what you can bid and still be profitable.
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About the author
Nicklas Segatz Mortensen
Growth hacker and fractional CMO with 10+ years' experience and hundreds of millions in managed ad spend behind him. Background from larger Danish and international scale-ups, and from the agency world.
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