Gross margin and net margin are both profitability ratios, but they measure very different things. Confusing them is one of the most common mistakes in financial analysis.
Gross margin
Gross Margin = (Revenue − COGS) / Revenue × 100
Gross margin only subtracts the direct costs of producing your goods or services (materials, direct labour, manufacturing overhead). It ignores all operating expenses.
A high gross margin tells you: "for every dollar of revenue, this much is available to cover overhead and generate profit."
Net margin
Net Margin = Net Income / Revenue × 100
Net margin subtracts everything: COGS, operating expenses (sales, marketing, R&D, G&A), interest, and taxes. It is the bottom-line profitability measure.
Why they diverge
A company can have a 75% gross margin but a −20% net margin if it is burning on growth investments. This is common in early-stage SaaS.
Conversely, a retailer with a 25% gross margin might achieve a 10% net margin through extremely lean operations.
Which do investors care about more?
For SaaS: gross margin is primary. Investors use it to model long-term operating leverage — can the business eventually achieve 25–30%+ EBIT margins?
For mature businesses: net margin and EBITDA matter more because the growth investment phase is behind them.
Use the gross profit margin calculator to compute both gross profit and markup from your revenue and COGS.