Gross margin vs net margin

Gross margin is the share of revenue left after the cost of goods sold, while net margin is the share left after every cost.

By Berend Vrakking, founder of Product Metrics. Updated 7 October 2026.

Formula

Gross margin = (revenue − cost of goods sold) ÷ revenue · Net margin = net profit ÷ revenue

Net profit is revenue minus all costs: cost of goods sold, the other variable costs, ad spend, fixed costs, interest and tax. Contribution margin sits between the two: (revenue − variable costs) ÷ revenue.

Example

Worked example, one month
Step	Amount	Margin
Revenue (excl. VAT)	€50,000.00	100%
Cost of goods sold	−€30,000.00
Gross profit	€20,000.00	40% (gross margin)
Shipping, payment fees, packaging and returns	−€6,000.00
Contribution profit	€14,000.00	28% (contribution margin)
Ad spend	−€5,000.00
Staff, rent and software	−€5,500.00
Interest and tax	−€500.00
Net profit	€3,000.00	6% (net margin)

The same month shows a 40% gross margin, a 28% contribution margin and a 6% net margin. Ad targets come from the 28%: break-even ROAS is 1 ÷ 0.28 = 3.57. Illustrative data.

For one product, and for an account

Gross margin and contribution margin can be worked out per product, from its price, product cost, shipping and returns. Net margin belongs to the whole business: no single product causes rent, staff or tax, so any split across products is a choice, not a measurement.

For ads, use contribution margin. Gross margin leaves out shipping, fees and returns, so a ROAS target from it is too low. Net margin has ad spend already taken off, so a target from it counts ads twice and comes out far too high: 1 ÷ 0.06 = 16.7 in the example.

Common mistake

Celebrating a 40% gross margin. In the example it shrinks to a 6% net margin once variable costs, ads and fixed costs have had their turn.

Questions

Which is more important, gross margin or net margin?

Neither wins outright. Gross margin shows whether your prices cover what the products cost; net margin shows whether the business makes money after every cost. To judge ads per product, use contribution margin, which sits between them.

Can gross margin be high and net margin low?

Yes. Shipping, fees, returns, ad spend, staff and rent all come off after gross margin, so a 40% gross margin can end as a single-digit net margin.

Is net margin the same as net profit?

No. Net profit is an amount, such as €3,000.00 for the month. Net margin is that amount as a percentage of revenue, such as 6%.

Keep reading

Gross marginThe formula and a worked example for gross margin alone.
Contribution marginThe margin between gross and net, used for break-even ROAS.
Variable costThe costs that turn gross margin into contribution margin.
Cost of goods soldThe only cost gross margin takes off.
Break-even ROAS calculatorFind the return each product needs to break even.
Markup and margin calculatorWork out margin, markup and selling price from cost.