Gross margin asks whether the product is profitable; net margin asks whether the company is. A great product inside a bloated company shows high gross and low net.
Side by side
| Gross Margin | Net Margin | |
|---|---|---|
| Subtracts | Cost of goods sold only | Every cost, including tax and interest |
| Diagnoses | Pricing and production efficiency | Overall business health |
| Typical software figures | 70–85% | 10–25% |
| Typical grocery figures | 25–30% | 1–3% |
Strengths of each
Gross Margin — strengths
- Isolates unit economics
- First number investors check
Net Margin — strengths
- The actual bottom line
- Comparable to profit benchmarks
Worked example
A store with $500,000 revenue and $210,000 COGS has a 58% gross margin. After rent, payroll, and taxes, $62,000 remains: 12.4% net margin. Both numbers are “the margin” — always specify which.
FAQ
Why is my gross margin fine but net margin negative?
Operating costs are eating the contribution. Fixed costs are too high for current volume — see the break-even calculator.
Which do lenders care about?
Both, but debt service comes from net cash flow, so net margin and cash flow get the scrutiny.