What it measures
Gross margin is the share of each sales dollar left after paying the direct cost of making or delivering the product (cost of goods sold). If a company sells something for $100 and it cost $40 to make, the gross margin is 60%.
It is the first line of profit, before salaries, research, marketing, interest and tax. See gross margin in the glossary.
What it reveals
Gross margin is the clearest sign of pricing power. A company that can charge far more than its product costs has something customers cannot easily get elsewhere: a brand, a patent, a network, or software that is costly to switch away from. See Economic moats.
A low gross margin is not bad in itself; it describes a business model. But it leaves little room for error, and it usually means competition on price.
Typical ranges by business type
| Business type | Typical gross margin |
|---|---|
| Software and SaaS | 65% to 80% |
| Consumer brands | 55% to 70% |
| Hardware | 35% to 50% |
| Retail | 20% to 35% |
| Commodities | 10% to 25% |
Compare a company with its own industry, not with the whole market.
The trend matters
- Rising gross margin: pricing power is growing, or costs are falling as the company scales.
- Stable gross margin: a healthy, predictable business.
- Falling gross margin: price cuts, rising input costs, or a shift to lower-value products. Always find out why; it is one of the first signs a moat is weakening.
Management usually explains margin moves on Earnings reports and calls. Listen for it.
Caveats
- Companies classify costs differently, so compare peers carefully.
- A one-time inventory write-down can hit a single quarter.
- Gross margin says nothing about overhead; check Net margin too.
See also
- Net margin Net profit margin shows how much of each sales dollar a company keeps after every cost. What counts as strong, and how to read its trend.
- Economic moats What an economic moat is, the five main types of competitive advantage, and how to tell whether a company's moat is widening or shrinking.
- The income statement How to read an income statement line by line, from revenue to earnings per share, and which lines matter most for investors.
- Revenue growth (TTM and forward) How to read revenue growth, the difference between trailing (TTM) and forward growth, what counts as strong, and the deceleration warning sign.
Pages that link here: Building your investing knowledge, Earnings reports and calls, Finviz screener guide, Fundamental analysis, Fundamentals checklist, How to read financial statements, How to research a company, Operating margin, Price-to-sales ratio (P/S), Stocks as ownership, not symbols
Last updated September 30, 2026. Education only, not investment advice.