# Difference Between Gross Margin and Gross Profit

Sometimes the terms gross margin and gross profit are used interchangeably, which is a mistake. While they measure similar metrics, gross margin measures the percentage (or dollar amount) of the comparison of a product's cost to its sale price, while gross profit measures the percentage (or dollar amount) of profit from the sale of the product.

## Gross Profit

Gross profit is the total sales minus the cost of generating that revenue. In other words, gross profit is sales minus cost of goods sold. In simple terms, it is your total profit minus other expenses such as salaries, rent, and utilities.

Sales minus COGS (Cost of Goods Sold) = Gross Profit in Dollars

Note that generally accepted accounting principles (GAAP) require that gross profit be broken out and clearly labeled on all profit and loss (P&L) statements.

## Gross Margin

Gross margin is the gross profit divided by total sales. So, if your store made \$500,000 in sales and had \$250,000 in gross profit, then you have a gross margin of 50 percent.

(Gross Profit/Sales) x 100 = Gross Margin Percent

One of the key components of this examination is the health of a store. For example, if Store A and Store B have the same sales, but Store A's gross margin is 50 percent and Store B's gross margin is 55 percent, which is the better store? In regard to efficiency with inventory, Store B is the winner. But, Store B could have higher overhead costs or pay its employees \$2 more per hour than Store A. So, even though Store B generated 5 percent more in gross margin, it still may have made the same net profit for the year.

If this seems confusing, consider this example. If you're selling TVs and have a gross margin of 30 percent and your competitor is selling TVs and has a gross margin of 40 percent, does this indicate that you are doing something wrong? The key point is that a gross margin percentage is just a consideration and may not be true indicator of a well-implemented pricing strategy.