An anonymous commenter on my previous post wrote,
maybe you need a refresher in the most basic tenets of finance and accounting because gross margin is a percentage, not an absolute dollar figure. you’re referring to GROSS PROFIT, but calling it gross margin.
First correction on this comment is – Gross Margin can be expressed as either absolute dollar value or as percentage. In most situations it is understood by context – especially by the practitioners. Gross Profit and Gross Margin are used interchangeably as well. See for example Apple’s earnings release
But when Google Finance shows Apple’s financials they refer to it as Gross Profit.
Sometimes we see Gross Margin Percentage explicitly used to indicate percentage margin. Again practitioners are not confused by any of the terms even when two of them are used interchangeably.
What is Gross Margin? (or Gross Profit)
Expressed as dollar value it revenue less cost of goods sold. Expressed as a percentage it is this difference divided by revenue.
The anonymous commenter (who seem to have inexplicably routed his IP traffic through Fool.com, because I know MotleyFool is not afraid of making comments) added,
gross margin is the percentage that a company nets on the sale of a good after dividing it by its cost of goods sold.
That is not true. What this person is confusing with is Markup. While Gross Margin (etc.) are financial accounting terms Markup is not. Its origins are in cost based pricing. You compute the cost to make a widget, add your preset margin you want to extract and call it the price.
Which you, my right tail readers, know is simply gross way to set prices. It would serve us all well if we banish the “Mark Brothers” – Mark Up and Mark Down.
Another note on Gross Margin – it is a financial accounting term used for financial reporting purposes. The intended audience are investors and regulators. Since competitors can also see this companies do not want to signal their exact cost structure. So they confound this number with a share of fixed cost allocation from manufacturing.
If you as a product manager or marketer going to worry about margin, worry about customer margin.