Why gross profit margin and not revenue or just gross profit? Unlike revenue, gross profit margin takes into expenses such as cost of production and sales. On the other hand, gross profit only shows an absolute profit value without the comparison to total revenue. Gross profit margin provides better contexts and highlights potential areas for improvement.
Take promotional campaigns as an example. They tend to increase purchase and average order value. However, you have to consider the costs going into production and marketing. Gross profit margin helps you see the actual profitability of these campaigns.
With gross profit margin, you can determine whether to focus on pricing, production, marketing, or development. The higher the margin, the greater the revenue left to cover operating costs and make a profit. Here are some gross margin benchmarks in 2018 according to The Retail Owners Institute:
- Cosmetics, beauty supplies, and perfume: 45.5%
- Furniture: 45%
- Women’s apparel: 46.5%
- Pet and pet supplies: 43.6%
- Audio/video and consumer electronics: 36.6%