Gross margin vs net margin — what's the difference?
Gross margin tells you whether the product economics work. Net margin tells you whether the business does. Confusing them is the #1 reason early-stage operators think they're profitable when they're not.
Gross Margin
Revenue minus cost of goods sold (COGS), as a percentage of revenue.
When to use: Pricing decisions, unit economics, comparing across SKUs or plans.
Net Margin
Revenue minus all expenses (COGS + opex + interest + tax), as a percentage of revenue.
When to use: Profitability reporting, valuation, board metrics, founder take-home modeling.
Bottom line
A SaaS at 80% gross margin and 5% net margin is normal. A DTC brand at 60% gross and 3% net is normal. If gross margin is below 40%, no amount of opex discipline will save the business.
Frequently asked
Where does shipping go — COGS or opex?
Outbound shipping that's tied to a sale is COGS. Warehousing, returns processing, and customer support sit between — most teams put them in COGS for honesty.
Why is net margin so much smaller than gross?
Because opex (salaries, rent, marketing, software, taxes) is the entire infrastructure of running the business. A 20-person SaaS spends 60–80% of revenue on payroll alone.