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Gross margin

Gross profit as a share of price

Gross margin is the share of the selling price you keep after paying for the goods. You calculate it as price minus cost of goods, divided by price, times 100, always on prices excluding VAT. A 40% gross margin means a product sold for €1,000 leaves you €400 for advertising, overheads and profit.

Formula(price − cost) ÷ price × 100
Unitpercent or currency
Where to find itstore back office, accounting
Limit for adsmax ACoS = margin

What is gross margin

Gross margin is the share of the selling price you keep after paying for the goods. You calculate it as price minus cost of goods, divided by price, times 100, always on prices excluding VAT. A 40% gross margin means a product sold for €1,000 leaves you €400 for advertising, overheads and profit.

In advertising, margin is the input to every return calculation. It sets your break-even ROAS, your maximum ACoS and how much a single order is allowed to cost. Without it, you cannot tell whether ads make money.

There are two margins worth separating. Gross margin subtracts only the cost of goods. Real margin also subtracts the costs that come with every order: free shipping, payment processing fees, packaging, returns and discount codes. For managing ads, the second one is the one that counts.

Gross margin formula

Margin is always calculated on prices excluding VAT or sales tax, and always against the selling price, not the cost. If you divide by cost, you are calculating markup.

Gross margin %(price − cost) ÷ price × 100Example: (€1,000 − €600) ÷ €1,000 × 100 = 40%
Gross profitprice − costExample: €1,000 − €600 = €400
Markup(price − cost) ÷ cost × 100Example: €400 ÷ €600 × 100 = 67%
Price from target margincost ÷ (1 − margin)Example: €600 ÷ (1 − 0.4) = €1,000

Margin can never exceed 100%; markup can. When a supplier or a colleague says “we double it”, they mean a 100% markup, which is a 50% margin.

Gross margin calculator

Enter the price and costs of one product. The calculator returns gross margin, markup and the break-even ROAS based on real margin, the line below which advertising this product loses money.

Margin, markup and your ad break-evenLive calculation
Gross margin40%of the selling price
Markup67%on the cost price
Break-even ROAS313%from real margin

What is a good gross margin

There is no universal number; margins vary by industry and by category within the same store. For advertising, the rule is simple: the lower the margin, the higher the ROAS you need and the less room a campaign has to test. At a 50% margin, ads pay for themselves from a 200% ROAS; at 15%, only from 667%.

Track margin over time, not just when you set the price. At Vše pro pejska, orders from ads grew 46% in winter 2025/26, but gross margin as a share of revenue fell from 49.9% to 44.8%. Growth brought more customers, not more profit.

Our rule: one table a month with revenue, Google spend, Meta spend and margin after ads. The store’s back office decides, not the sum of what each ad platform claims. Margin after ads relative to ad spend is what POAS measures.

Gross margin vs markup vs trade discount vs ACoS

Four percentages that get mixed up most often in pricing and advertising. Each one divides by something different.

TermFormulaWhat it answers
Gross margin(price − cost) ÷ price × 100How much of the selling price you keep
Markup(price − cost) ÷ cost × 100How much higher the price is than the cost
Trade discount(list price − cost) ÷ list price × 100What discount off the list price your supplier gives you
ACoSad spend ÷ revenue × 100How much of the price ads eat; must stay below margin

Three gross margin mistakes

Confusing margin with markup

A 50% markup is a 33% margin. If you price with markup and then calculate break-even ROAS as if it were margin, you get a 200% line instead of 300%, and your ads quietly lose money.

Calculating with VAT included

VAT is not your money. Margin on a VAT-inclusive price comes out higher than it is. Example: a product priced at €1,210 including 21% VAT with a €600 cost looks like a 50% margin; in reality it is 40%.

Using one average margin for the whole store

Averages hide the spread. A range with 50% and 10% margins averages 30%, yet ads for the low-margin category need a 1,000% ROAS, not 333%. Track margin by category and split campaigns along it.

FAQ

What is gross margin in simple terms?

How much of the selling price you keep after paying for the goods. You sell for €1,000 excluding VAT, you bought for €600, so gross profit is €400 and gross margin is 40%.

How do you calculate gross margin?

(selling price − cost of goods) ÷ selling price × 100, both excluding VAT. For advertising, also subtract shipping, payment and return costs to get your real margin.

What is the difference between margin and markup?

Margin divides by the selling price, markup by the cost. From the same numbers markup is always higher: a €1,000 product with a €600 cost has a 40% margin and a 67% markup.

Should gross margin include VAT?

No, if you are VAT-registered, because you pass the tax on to the state. If you are not registered, use the price the customer pays and the cost including the VAT you cannot reclaim.

Why does gross margin matter for advertising?

It sets the line below which ads lose money. Break-even ROAS is 1 ÷ margin × 100 and maximum ACoS equals margin. A store with a 20% margin needs at least a 500% ROAS; one with a 50% margin needs only 200%.

01 When 400% ROAS beats 500% ROASHow to read ROAS against margin, and why a higher number does not have to mean more profit. Read the article ↗ 02 Why one PMax for the whole store can hold growth backWhy one target ROAS doesn’t fit a range with different margins, and when to split the campaign. Read the article ↗

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