Gross Margin Calculator UK

Gross Margin Benchmarks by Industry (UK 2025)

Use these benchmarks to see how your gross margin compares to other UK businesses in your sector. Remember that gross margin is only one indicator of profitability; operating expenses, headcount, and capital intensity all affect whether a given margin is sustainable.

What Is Gross Margin and Why Does It Matter?

Gross margin is one of the most fundamental KPIs in business finance. It tells you what proportion of your revenue is left after paying for the direct costs of producing or purchasing the goods and services you sell. The remaining amount, the gross profit, must cover all your other costs: rent, salaries of non-production staff, marketing, technology, and eventually, profit for the owners or shareholders.

For UK businesses, gross margin is particularly important because it is the first line of defence against rising costs. When raw material prices increase, energy bills go up, or supplier prices rise, the gross margin is typically the first metric to be squeezed. A business with a 60% gross margin can absorb a 10% increase in COGS much more comfortably than one operating on a 15% margin.

The Gross Margin Formula Explained

The core formula is straightforward:

• Gross Profit (£) = Revenue − Cost of Goods Sold (COGS)
• Gross Margin (%) = (Gross Profit ÷ Revenue) × 100
• Markup (%) = (Gross Profit ÷ COGS) × 100

The distinction between gross margin and markup confuses many business owners. Both measure the same underlying profit but use a different denominator. Gross margin uses revenue as the base, while markup uses cost as the base. This means markup is always a higher number than the equivalent gross margin. A 50% markup on a cost of £50 gives a selling price of £75, which is a gross margin of 33.3%, not 50%.

This difference matters enormously in pricing decisions. If you set prices by applying a markup to your costs, you must be careful not to confuse the markup percentage with the gross margin percentage. Many small business owners discover, sometimes after years of trading, that their apparent 50% markup was only delivering a 33% gross margin, which was insufficient to cover their overheads and generate profit.

What Is Included in Cost of Goods Sold?

Cost of Goods Sold (COGS), sometimes called Cost of Sales (COS), includes all direct costs associated with producing or acquiring the goods or services you sell. The exact composition varies by business type.

For a product-based business (manufacturer or retailer), COGS typically includes: raw materials and components, direct labour (workers on the production line or in the warehouse picking and packing orders), manufacturing overhead directly tied to production (equipment depreciation, factory utilities), and freight inward (the cost of getting goods to your warehouse). It does not include sales team wages, office rent, accounting fees, or marketing spend, all of which are operating expenses.

For a service business, COGS (sometimes called Cost of Delivery or Cost of Revenue) includes the direct costs of delivering the service: hourly contractor fees, software licences used solely for client work, and the portion of employee time spent directly on billable work. A management consulting firm, for example, would include consultant salaries (or the billable portion thereof) but not the cost of the business development team or office administration.

For an e-commerce business, COGS includes the wholesale cost of goods purchased for resale, inbound freight, fulfilment fees (if outsourced to a 3PL), and packaging materials. Merchant fees (Stripe, PayPal, etc.) are sometimes included in COGS and sometimes classified as a separate cost; consistency is more important than the exact treatment, so long as you apply the same approach each period.

How to Improve Your Gross Margin

There are four main levers for improving gross margin, and most businesses will find that a combination of all four is more effective than relying on any single approach.

1. Raise prices. This is the most direct route to a higher gross margin and is often underused by UK businesses. Even a 5% price increase on a 40% gross margin business improves the margin by several percentage points, assuming volume holds steady. Research suggests that customers are often less price-sensitive than business owners assume, particularly for differentiated products and professional services. If you have not reviewed your pricing in the past 12 months, it is worth modelling the margin impact of a modest increase.

2. Reduce the cost of goods sold. Renegotiating supplier contracts, consolidating purchasing to gain volume discounts, reducing waste and shrinkage in production, and finding alternative suppliers can all reduce COGS. For manufacturers, lean manufacturing techniques and better inventory management can meaningfully reduce direct costs over time. For retailers, reducing slow-moving stock that must be discounted at the end of season has an outsized impact on average realised margin.

3. Shift product or service mix. Not all products or services have the same gross margin. If you sell both high-margin and low-margin products, actively promoting the higher-margin items or phasing out the lowest-margin lines can improve your blended gross margin without changing any individual prices or costs.

4. Improve operational efficiency. For labour-intensive businesses, improving output per employee through better tools, training, or processes reduces the direct labour component of COGS. For manufacturers, reducing scrap rates and improving yield directly improves gross margin. For service businesses, using technology to automate repeatable tasks can allow the same team to serve more clients, improving gross margin per head.

Gross Margin vs Operating Margin vs Net Profit Margin

These three margins appear at different points on a UK profit and loss account and each tells a different story. Gross margin measures the efficiency of production or service delivery. Operating margin (also called EBIT margin) measures the efficiency of the entire business operations, after deducting all operating expenses from gross profit. Net profit margin is what remains after interest, tax, and any exceptional items.

A business might have a healthy 60% gross margin but a thin 5% net profit margin if its operating expenses (particularly staff costs, rent, and marketing) are very high relative to revenue. Conversely, a business with a 20% gross margin can still be highly profitable if its operating cost base is lean. Understanding all three margins together gives a much clearer picture of financial health than any single metric in isolation.

Using Gross Margin for Pricing Decisions

One of the most practical uses of the gross margin formula is working backwards from a target margin to determine the correct selling price. If you know your cost and you have set a minimum acceptable gross margin (often based on the minimum margin needed to cover overheads and break even), you can calculate the floor selling price as: Selling Price = Cost ÷ (1 − Target Margin). For example, a business with a £25 unit cost and a required 45% gross margin must sell at at least £45.45 (£25 ÷ 0.55).

This approach is particularly useful when responding to customer price negotiations. Rather than discounting blindly, you can model the exact margin impact of any proposed discount and make an informed decision about whether the margin at the lower price is still acceptable after covering your fixed cost base.

Gross Margin and Cash Flow

A common misconception is that a high gross margin automatically means strong cash flow. In reality, many high-gross-margin businesses struggle with cash flow because of working capital requirements. A professional services firm billing £100,000 per month with a 65% gross margin still needs to fund payroll before it receives client payments, which can create significant cash pressure during periods of rapid growth. Conversely, a low-margin supermarket with rapid stock turnover and suppliers paid on 60-day terms may actually generate strong operating cash flow despite thin margins.

For UK businesses, the key cash flow metric to track alongside gross margin is the cash conversion cycle: how long it takes from spending money on inputs to receiving cash from customers. Reducing debtors days outstanding (days sales outstanding, or DSO) is often as valuable as improving gross margin from a cash perspective.

Frequently Asked Questions