Gross margin is revenue minus the cost of delivering it, divided by revenue. It is the first number an investor or a buyer looks at, because it tells them what kind of business you are running regardless of size.
What counts as cost of delivery
- Agency or freelance: the people doing the client work, and any subcontractors.
- Ecommerce: the product, the packaging, the shipping, the payment fees.
- Software: hosting, support, and third-party services that scale with users.
- Not included: your rent, your marketing, your admin, your own salary if you are not delivering.
Rough shapes to compare against: software often runs 70-85%, agencies 40-60%, ecommerce 30-50%, and reselling anything can be under 20%. The exact benchmark matters less than knowing yours and watching it move.
Why it decides your strategy
Margin is your budget for everything else. At 60% you can afford a salesperson and a marketing spend; at 20% you cannot, and you have to win on volume or operational discipline instead. Businesses that chase revenue while margin quietly falls end up busier and poorer.
Try it
Calculate gross margin for your last three months. Then calculate it for your single biggest client or product line. If one is dragging the average down, you have found this quarter’s decision.