What is gross profit margin?
Gross profit margin measures how much of every dollar of revenue you keep after covering the direct cost of delivering the work. It’s the single most important number in any proposal — if your margin is too thin, no amount of volume will save you.
Gross Margin (%) = (Revenue − COGS) ÷ Revenue × 100
Example: You charge a client $10,000 for a project. Your direct costs (materials, subcontractors, tools) total $6,000.
- Gross Profit = $10,000 − $6,000 = $4,000
- Gross Margin = $4,000 ÷ $10,000 × 100 = 40%
That 40% must cover your overhead, taxes, and profit. If it doesn’t, the project loses money even though it “looks” profitable on paper.
Gross margin vs. markup — what’s the difference?
These two numbers are easily confused, but they measure different things. Margin is based on revenue; markup is based on cost.
| Gross Margin | Markup | |
|---|---|---|
| Formula | (Revenue − Cost) ÷ Revenue | (Revenue − Cost) ÷ Cost |
| Base | Selling price | Cost price |
| Example | $4,000 ÷ $10,000 = 40% | $4,000 ÷ $6,000 = 66.7% |
| Best for | Evaluating profitability | Setting prices from cost |
A 50% markup is not the same as a 50% margin. If you quote using markup but track performance using margin, your numbers will never match.
What’s a good profit margin?
There’s no universal answer — it depends on your industry, business model, and cost structure. Here are rough benchmarks:
- Service businesses (consulting, design, dev): 50–70% gross margin
- Construction & trades: 25–45% gross margin
- Retail & e-commerce: 30–50% gross margin
- Manufacturing: 20–35% gross margin
If your margin is below 20%, you’re likely covering direct costs but not your overhead or profit. That’s a pricing problem, not a volume problem.
Why your margin might be lower than you think
Most people calculate margin on paper and assume it’ll hold. In practice, three things eat it:
- Overhead costs — rent, software, insurance, accounting. These aren’t in your COGS, but they reduce net profit. Learn how to calculate overhead →
- Hidden costs — admin time, revisions, client calls, travel. They’re real hours that never make it onto an invoice. See the full list of hidden costs →
- Scope creep — the project grows but the price doesn’t. Without a contingency buffer, every extra request comes straight out of your margin.
The fix? Build all three into your quote before you send it. That’s what the rest of the Academy covers.
