Gross Margin

Gross margin is gross profit as a percentage of revenue: (revenue - cost of goods sold) / revenue. It measures what the company keeps from each sale before overhead, marketing, R&D, interest, or taxes.

Gross margin is a fingerprint of the business model. Software runs 70-90% because copying code costs almost nothing; grocery stores run 20-30%; airlines and refiners sit lower still. Within a sector, the company with a durably higher gross margin usually has pricing power or a cost advantage the others lack.

Direction beats level. A software company drifting from 78% to 71% gross margin over four quarters is telling you something — hosting costs rising, discounting to close deals — long before it shows up in the bottom line.