Definition:

Gross profit margin is the ratio of gross profit and net revenue in percentage.

Example:

If your company generates $1,000 revenue, and the Direct Costs or Cost Of Goods Sold (COGS) were $600, your gross profit equals $400. Given that gross profit margin is a ratio of gross profit to revenue, it will be 40%.

Why it matters:

Gross profit, also called gross income tells how much you make after subtracting the additional costs you incur for making each product. Too low a gross profit margin and you may struggle to cover the other costs associated with running your business. Too high a gross profit margin and you may be slowing your growth by pricing your product or service too high.