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Gross margin is the percentage of revenue left after the cost of the goods you sold. It is calculated by subtracting COGS from net sales and dividing by net sales. For Shopify and DTC brands, gross margin sets the amount available to cover marketing, shipping, payroll and other operating costs.
What is Gross Margin?
Gross margin is one of the first tests of whether a product business has enough room to cover its other costs. Everything downstream; acquisition, fulfillment, payroll and overhead, has to fit inside it.
The gross margin in your accounting software does not always reflect the margin you realise after all relevant sales adjustments and product costs. Discounts and refunds reduce net sales, while shipping subsidies can add to the costs that sit below gross margin. If these items are handled differently across periods, the reported margin can be difficult to compare.
The other common error is on the cost side. COGS should include landed cost: unit price plus freight, duties and tariffs. Brands that use supplier invoice price alone can overstate their margin because freight, duties and tariffs are missing from product cost. This can create a misleading gap between reported profit and the cash the business actually has available.
Gross Margin Formula
- Gross Margin % = (Net Sales − COGS) ÷ Net Sales × 100
On $500,000 of net sales with $200,000 of landed product cost:
- ($500,000 − $200,000) ÷ $500,000 × 100 = 60% gross margin
Use net sales, after discounts and refunds, not gross sales. Payment processing, outbound shipping and similar variable costs may be included in contribution margin or another profitability measure rather than gross margin, depending on the accounting policy. Whichever definition you use, keep it consistent. Margin trends are only useful when the inputs are measured the same way over time.
SMB/DTC Benchmark
A 2026 benchmark based on 11 public-company 10-K filings reports a median gross margin of 57%, with the 25th percentile at 46% and the 75th percentile at 64%. The sample includes companies such as Warby Parker, Olaplex, e.l.f., YETI and Lululemon. Broader eCommerce benchmarks often place gross margin around 50–70%, although the appropriate range varies significantly by category and business model.
- Beauty and personal care: 70–78% in some DTC benchmark sets
- Apparel: 50-62%
- Outdoor and hardgoods: 50-58%
- Household CPG: 38-48%
- Food and beverage CPG: 28-42%
- Consumer electronics: 15-25%
Private brands may run below public company benchmarks because listed companies can benefit from greater purchasing scale and operating efficiencies. A private apparel brand may therefore use a lower range than the public company benchmark when setting its own target.
Why is Gross Margin Important?
Gross margin helps inform your CAC limit, break even ROAS and how much discounting the business can absorb. With a 40% gross margin, a simplified break even ROAS based only on product cost is 2.5x. If acquisition costs consume 30% of revenue, a 40% gross margin leaves only 10% of revenue before fulfillment, payroll, overhead and other operating costs.
It also explains the gap many founders find baffling: a brand can have a 70% gross margin and a 10% net margin. The 60 percentage point difference represents marketing, fulfillment, payroll, overhead, taxes and other costs below gross profit.
The decisions this metric should inform are pricing, product mix and which products can support the business’s cost structure.
Is Your Gross Margin Telling the Full Story?
Gross margin is only useful when your sales and product costs are measured consistently. We connect revenue, discounts, refunds, landed costs, and product data so you can see where margin is being gained or lost and make better pricing and product decisions.
DataAnalyticsStack is a managed Financial & Profitability Analytics partner, not a dashboard tool you have to build yourself, and not a one off consulting project.
