Gross Margin

Gross margin is the percentage of revenue a company keeps after subtracting the direct cost of making or buying the product it sells, and it is the most basic measure of whether a product is financially viable. If a lipstick sells for $30 and costs $9 to manufacture, package, and ship to the warehouse, the gross margin is 70%. That 70% must then cover marketing, salaries, rent, technology, and every other cost of running the business, which is why e.l.f. Cosmetics has a 70% gross margin but only keeps 6% as net profit.

How It Works

The calculation

Gross margin equals revenue minus cost of goods sold (COGS), divided by revenue, expressed as a percentage. COGS includes raw materials, manufacturing, packaging, and inbound freight, but not marketing, salaries, rent, or anything else it costs to run the business. A $30 product with $9 in COGS has a gross margin of 70%. A $30 product with $18 in COGS has a gross margin of 40%. That 30-point difference determines whether the business has enough room to spend on growth and still turn a profit.

What counts as “good”

Gross margin benchmarks vary dramatically by industry. Beauty brands run 60 to 76%, SaaS companies target 75%+, apparel lands at 40 to 70%, and food and beverage runs 16 to 35%. The average across all US businesses is 37.8%. A gross margin below 50% in consumer products makes profitability extremely difficult because the remaining margin must cover marketing (often 20 to 40% of revenue for DTC brands), fulfillment, and overhead.

Why it is not profit

Gross margin measures product economics, not business economics. Estee Lauder has a 76% gross margin and is currently losing money. Coty has a 65% gross margin and is also losing money. The costs between gross margin and net margin, including marketing, distribution, debt service, and restructuring charges, consume the advantage. Globally, roughly one in four companies with positive gross margins still post net losses.

Real Example

Kylie Cosmetics achieved 60 to 70% gross margins with manufacturing outsourced to Seed Beauty and only 12 employees. Because the cost structure was so lean, EBITDA margins exceeded 25%, meaning a quarter of every dollar became operating cash. Most beauty brands at similar revenue levels run EBITDA margins of 10 to 15% because they have hundreds of employees and their own manufacturing.

Go Deeper

• Margins and Profitability: The full margin stack from gross to net, with industry benchmarks and real brand examples.
• EBITDA: The operating cash flow measure that sits between gross margin and net profit.
• Unit Economics: How customer acquisition cost and lifetime value determine whether growth is profitable.

Frequently Asked Questions

What is gross margin?

Gross margin is revenue minus the cost of goods sold (COGS), expressed as a percentage. It measures how much money is left after making the product, before accounting for marketing, salaries, rent, or any other operating expense. A 70% gross margin means 70 cents of every dollar of revenue survives the cost of production, but those 70 cents still need to cover everything else.

What is a good gross margin for a beauty brand?

Beauty brands typically run 60 to 76% gross margins, with e.l.f. Cosmetics at 70% and Estee Lauder at 76%. DTC beauty brands tend to have higher gross margins than wholesale-dependent brands because they capture the full retail price. Below 50%, profitability becomes very difficult because marketing alone can consume 20 to 40% of revenue.

What is the difference between gross margin and net margin?

Gross margin only subtracts the cost of making the product. Net margin subtracts every cost the business incurs: marketing, salaries, rent, interest, taxes, and one-time charges. e.l.f. Cosmetics has a 70% gross margin and a 6% net margin, meaning 64 cents of every dollar disappears between making the product and keeping the profit.

Why do some companies with high gross margins still lose money?

Because gross margin only covers COGS. If marketing is 25% of revenue, salaries and operations are 20%, and other overhead takes another 15%, those costs consume 60 percentage points of a 70% gross margin, leaving single-digit net margins or outright losses. Estee Lauder (76% gross margin) and Coty (65%) are both currently unprofitable despite strong product economics.

Sources

• Macrotrends, “e.l.f. Beauty Gross Margin,” 2026. e.l.f. margin data across all levels.
• Vena Solutions, “Average Profit Margin by Industry,” 2025. Industry benchmarks and US averages.
• Aswath Damodaran, “Data Update: The End Game,” 2025. Global profitability progression data.