What is gross margin?
Gross margin is the percentage of revenue remaining after deducting the direct costs of production, also called cost of goods sold. A gross margin of 40% means that for every £1 of revenue, 40p remains to cover operating costs and generate profit. Gross margin varies significantly by industry: software businesses often exceed 70%, while retailers may operate at 20-30%.
What is the difference between markup and margin?
Markup is calculated as a percentage of cost. A 50% markup on a £10 product gives a selling price of £15. Margin is calculated as a percentage of selling price, so the same product has a gross margin of 33%. Confusing markup and margin is one of the most common pricing errors in small businesses.
What is a good net profit margin?
A healthy net profit margin for most UK SMEs is between 5% and 15%. Margins vary considerably by sector. Professional services and software companies typically achieve higher margins than manufacturing or retail. The most important metric is whether your margin is improving over time and how it compares to competitors.