Definition
Gross margin is gross profit as a percentage of revenue. It is foundational for payback, LTV, and break-even analysis.
Formula
Gross margin (%) = (revenue - COGS) / revenue
Common mistakes
- Using net margin when a model expects gross margin.
- Not keeping COGS definitions consistent across time or segments.
Measured as
Gross margin (%) = (revenue - COGS) / revenue
Misused when
- Using net margin when a model expects gross margin.
- Not keeping COGS definitions consistent across time or segments.
Operator takeaway
- Tie Gross Margin to the same balance-sheet date, scenario, and decision memo you are using elsewhere in the model.
- Document which claims, costs, or adjustments your team includes before comparing numbers across forecasts, covenants, or valuation work.
Next decision
- Quantify the impact with Break-even ROAS Calculator if you need to turn the definition into an operating assumption.
- Read Paid ads funnel: CPM, CTR, CVR -> CPC, CPA, ROAS (with profit) if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.
Where to use this on MetricKit
Calculators
- Break-even ROAS Calculator: Estimate the break-even ROAS based on contribution margin assumptions.
- Paid Ads Funnel Calculator: Model CPM -> CTR -> CVR to estimate CPC, CPA, ROAS, and profit per 1,000 impressions (with margin and variable costs).
- LTV Calculator: Estimate customer Lifetime Value (LTV) using ARPA, gross margin, and churn rate.
- LTV Sensitivity Calculator: See how gross profit LTV changes as churn and gross margin vary (simple 3x3 sensitivity).
- LTV:CAC Calculator: Compute LTV:CAC ratio and CAC payback using ARPA, gross margin, churn, and CAC.
Guides
- Paid ads funnel: CPM, CTR, CVR -> CPC, CPA, ROAS (with profit): A practical guide to the paid ads funnel: how CPM, CTR, and CVR drive CPC, CPA, ROAS, and profit - with formulas and common pitfalls.
- Fully-loaded CAC: what to include, what to exclude, and how to use it: Use this guide when paid CAC looks fine but cash efficiency still feels off. It shows which sales and marketing costs belong in fully-loaded CAC, what to exclude, and how to pair the result with payback for planning.
- LTV sensitivity: how churn and margin change LTV: A practical guide to LTV sensitivity: vary churn and gross margin to see how gross profit LTV changes under realistic scenarios.
- CAC payback sensitivity: ARPA * margin scenarios (months to recover CAC): A practical guide to CAC payback sensitivity: vary ARPA and gross margin to see how months to recover CAC changes under realistic scenarios.
- ARPA: how to calculate Average Revenue Per Account (formula + examples): ARPA (SaaS) explained: definition, ARPA formula, step-by-step calculation, and how to use ARPA with churn, payback, and LTV.