Plain definition
Gross profit margin equals gross profit ÷ revenue, expressed as a percentage. It measures the portion of revenue remaining after cost of sales under the stated accounting basis; it is distinct from markup and contribution margin.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A retailer has revenue of and cost of sales of , so gross profit is and gross margin 30%. A supplier increase raises cost of sales by ; management tests price, sourcing, and mix before accepting a 25% margin.
If volume and the new cost of sales stay unchanged, restoring a 30% gross margin requires revenue of about : 300,000 ÷ 70%. Management compares that price increase with customer demand and sourcing alternatives. Adding only the cost increase to revenue would not fully restore the percentage margin.
Why it matters
A margin fall can come from supplier cost, price discount, product mix, or inventory write-down. Treating all movements as a sales problem can produce the wrong remedy.
Practical consequence
Reconcile revenue and cost of sales, then split the variance into price, volume, mix, purchase cost, and write-downs. Test the cash and contract consequences of any price or sourcing response.
Try your own numbers
Separate profit per unit, margin on selling price, markup on cost, and a target-margin price.
Margin and markup