Gross margin is a vanity metric.

Brands flaunt gross margin and assume a good gross margin = profits. I tried to rely on gross margin, and it does not help. It gives almost no picture of business health and real profits. Here's why.

👋 Hola! Welcome to Out of Singapore. This is Shan and I share business and marketing learnings every Sunday here. I am building Xandro Lab, a longevity wellness company. I test, learn, and then share learnings here.

I don’t trust and believe generic advice available online (or in person). I listen to them, apply on a small scale and check the response. That’s testing or experimentation. If I have a strong hunch, I will continue testing an approach for longer periods of time, till the market and consumer prove me wrong. The key is to act, and bring products/ideas/hypothesis out to the real consumers, the ones who decide to pay or not pay. I let consumers be the judge. With that, let’s move to a controversial take - gross margin is a useless metric.

Let’s discuss this take in three segments -

1. What is gross margin? What does it show and hide.

2. Why is it a dangerous metric?

3. Which metric makes most sense? (forewarning, it’s not so common)

Let’s start.

#1 What is gross margin?

It is simple and most basic “profitability” metric.

Gross margin = Revenue - Cost of goods sold

Revenue should always be the amount paid by the customer, after all promotions. Do not fall into the GMV trap (where the promotions and discounts are added up). GMV is fake revenue. Real revenue is the value actually debited from customers.

Cost of goods sold is the total landed cost, or total cost of the finished goods when it reaches your warehouse or storage. This includes raw material, production, labour and shipping cost. Any customs or additional fees paid for making the product will also be part of COGS (cost of goods sold).

Gross margin tells you your “profit” margin on every sale. For example, bottle A costs 10 SGD and is sold at 40 SGD. Your gross margin is 40-10 = 30 SGD. You can represent this in percentage form by dividing with revenue. So, gross margin percentage is 75% (30/40).