What your gross margin tells you about pricing
What gross margin is, what it tells you and how to use it - explained
Your gross margin is your revenue minus your direct costs (the costs directly incurred to deliver your service or product), expressed as a percentage of revenue.
What it tells you
It shows how much of every pound of revenue you keep after paying for the work itself, before overheads. A falling gross margin means either your prices are too low, your direct costs are rising, or both.
Using it for pricing decisions
If you are considering a price increase or a change in supplier, model the impact on your gross margin before committing. In Xero, compare revenue to direct costs in your P&L to calculate your current gross margin percentage. If your gross margin is healthy but net profit is low, the problem is in your overheads, not your pricing.
💡 Good to know: A service business with no direct costs may have a near-100% gross margin, with all profit eroded by overhead. A product business should track gross margin carefully by product line. Contact us if you want help interpreting your margin figures.
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