What is Gross Profit Margin?
Definition: Gross profit margin is a financial metric that indicates how efficient a business is at managing its operations. It is a ratio that indicates the performance of a company's sales based on the efficiency of its production process. Gross profit margin is a percentage that is calculated by taking the gross margin (revenue minus cost of goods sold) and dividing it by the revenue.
In Plain English: Gross profit margin is the percentage of revenue that you have left after taking off the cost of creating or performing the products or services that you have sold.
Example: If you sold two shoes for $200 total and the cost of making those shoes was $80 total, your gross profit margin would be your gross margin divided by your revenue, which is $120/$200=0.60 or 60%
Why Should You Care?
Gross profit margin gives you an indication of the efficiency of your products/services’ production process. Because the gross profit margin is a ratio, it can show your production efficiency at any revenue volume.