Gross Margin vs Operating Margin: What's the Difference?
What is gross margin?
Gross Margin = (Revenue − Cost of Goods Sold) ÷ Revenue. Software runs 70–90%; retail 20–30%.
What is operating margin?
Operating Margin = Operating Income ÷ Revenue. Includes overheads. The closest measure of underlying business profitability.
Why does the gap matter?
A wide gap means the company spends a lot on overhead to convert production into sales. Fine if growth is real, a warning otherwise.
Frequently asked questions
Which margin matters more?
Operating margin is more comprehensive. Gross margin is better for spotting pricing power. Use both.
Can margins be negative?
Yes. Early-stage companies often run negative operating margins.
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