Gross Profit vs Gross Margin — What's the Difference?
Gross profit is an absolute dollar figure — the revenue left after paying for direct costs. Gross margin converts that to a percentage, enabling comparison across companies and time periods regardless of scale.
Both metrics matter: gross profit tells you the absolute dollars available to cover operating expenses; gross margin tells you the efficiency of your core business model. Growing revenue with a shrinking gross margin signals that costs are scaling faster than revenue.
What Counts as COGS?
COGS includes only costs directly tied to producing or delivering your product: raw materials, direct labour, manufacturing overhead, and for SaaS — cloud infrastructure, payment processing, and customer support costs. R&D, sales, marketing, and G&A are operating expenses, not COGS. Misclassifying operating expenses as COGS understates your true gross margin.
Gross Profit as a Foundation for the Income Statement
Gross profit is the money available to pay for everything else: R&D, sales, marketing, management, and ultimately profit. If gross profit doesn't exceed operating expenses, the business is structurally unprofitable regardless of revenue growth.
Investors use gross margin as a first filter when evaluating a business. SaaS investors expect 70%+; e-commerce typically 30–50%; manufacturing 20–40%. Understanding where you stand relative to your industry is essential for competitive positioning and fundraising.
70–80%
Target gross margin for pure SaaS
30–50%
Typical e-commerce gross margin
20–40%
Typical manufacturing gross margin
50–70%
Typical professional services gross margin