Gross margin is revenue minus the direct cost of delivering a product or service (cost of goods sold), expressed as a percentage of revenue. It measures how much of every dollar earned is left after the direct costs of making the sale.
A software company with minimal cost of goods sold might run 80-90% gross margins, while a company shipping physical inventory might run 30-50%, and neither figure is inherently good or bad on its own. What matters is whether it's normal for the business model and whether it's improving or eroding over time.
Gross margin is also one of the first things investors check when evaluating a business model, since it's a rough ceiling on how profitable the company can ever become at scale. A business with structurally thin gross margins has to make it up in volume, and that's a very different growth story than a high-margin business tells.
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