Gross Profit Margin: Why Sales Growth Doesn’t Always Mean Profit Growth
Steady sales. Loyal customers. On paper, the business looked solid. But behind the numbers, profits were thin, leaving little to pay the owner or reinvest in growth.
A conversation with another business owner introduced the concept of gross profit margin (GPM), the percentage of revenue left after covering the cost of what you sell. When the owner ran the numbers, the margin came out to 25 percent, well below the 40 percent industry benchmark.
That discovery sparked a plan. Over the next nine months, small but focused changes transformed the business:
Month 1: Identified that one high-cost supplier was cutting into profits.
Month 3: Switched suppliers, reducing material costs and raising GPM to 30 percent.
Month 5: Improved packaging and reduced waste, reaching 35 percent.
Month 9: Added high-margin products, pushing GPM above the 40 percent benchmark.
By year’s end, the business had more profit, more cash for product development, and a more sustainable model.
How to calculate gross profit margin
Find your numbers
Revenue: total sales for a period
Cost of goods sold (COGS): direct costs (materials, production labor, packaging)
Use the formula
Subtract COGS from revenue to get gross profit.
Divide gross profit by revenue.
Multiply by 100 to get the percentage.
Example:
Revenue = $100,000
COGS = $60,000
Gross Profit = $40,000
GPM = (40,000 ÷ 100,000) × 100 = 40%
This means that for every dollar earned, 40 cents remain after covering direct costs.
Why gross profit margin matters
Your GPM offers a clear view of your financial health and can help you:
Keep enough cash on hand for ongoing expenses
Spot areas where costs are too high
Grow without putting strain on cash flow
Sometimes, the key to higher profits isn’t selling more, it’s earning more from each sale.
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