Gross Margin
Definition
Gross margin is gross profit divided by revenue, where gross profit equals revenue minus cost of goods sold (COGS). It measures how much of each revenue dollar remains after the direct costs of producing the good or service.
Gross margin reflects pricing power, input costs, and product mix. Software companies often run gross margins above 70-80%, while retailers, distributors, and manufacturers run much lower because COGS dominates.
Analysts track gross margin trends to spot pricing pressure or cost inflation, and compare it across close peers, since business-model differences (e.g., what a company classifies in COGS) can distort comparisons.
Why interviewers ask
Margin questions test business intuition: "why does Company A have a higher gross margin than Company B?" Interviewers also probe classification traps — some companies include depreciation or delivery costs in COGS while others put them in opex, so gross margin comparisons need consistent definitions.
Related terms
Interviews don't test definitions — they test recall under pressure.
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