Gross Margin

The foundation metric the entire run-103→122 unit-economics cluster sits on: the share of revenue left after the direct cost of the goods sold, expressed as a percentage. It is the input to Contribution Margin (which then subtracts variable selling costs), the denominator behind break-even ROAS (= 1 ÷ gross margin), the numerator in GMROI (gross margin ÷ average inventory cost), and the first line every Unit Economics model starts from. This page was the most-linked dangling node in the vault (named "the cleanest next" across runs 119→122).

Firewall: every claim is what a source reports. The only independent source this run is NYU Stern / Damodaran (large US public firms); the specific apparel/DTC figures are all from vendors (Uphance, Retalon, Eagle Rock CFO, LedgerGurus) with a conflict of interest. See ../../CONTEXT.md Rule 1.

What it is

• Gross margin = [(total revenue − COGS) ÷ total revenue] × 100; a 37% gross margin means 37¢ is kept per $1 of revenue (Shopify).
• "Total revenue" in the formula means net sales — gross revenue minus returns and discounts — and COGS is direct production cost, materials + labour (Shopify).
• Gross profit is the dollar figure (Revenue − COGS); gross margin is that figure as a percentage of revenue (LedgerGurus, snippet).

Key terms

Term	Meaning (as reported)	Source
Gross margin %	(Net sales − COGS) ÷ net sales × 100	Shopify
Net sales	Gross revenue − returns − discounts	Shopify
COGS (apparel)	Landed cost: FOB + freight + duties + inbound handling + inspection	Uphance
Landed cost	FOB factory price plus all costs to get goods to the warehouse; typically 15–30% above FOB	Uphance
List margin	Margin at full price, before returns/discounts	Uphance
Realized margin	(1 − return rate) × list margin − returns-processing cost	Uphance
GMROI	Gross margin ÷ average inventory cost (margin $ per $ of inventory)	Retalon

Gross margin vs Contribution Margin

• Gross margin subtracts all direct production costs (COGS); contribution margin goes further and subtracts variable selling costs too (ad spend, shipping, payment fees, returns). Contribution margin is therefore always lower than gross margin (Shopify frames the comparison the opposite way round — see contradiction below).

How it's calculated in ecommerce

• For apparel, COGS should be landed cost, not factory FOB; landed cost runs 15–30% above FOB, so FOB-based margin overstates the true figure by that much (Uphance).
• Margin differs sharply by channel and a blended figure hides it: DTC ~60–75% on retail, wholesale ~40–50% on wholesale price, marketplace ~30–45% after platform fees (Amazon referral + FBA 25–35% of revenue) — Uphance (as-of 2026-06-27).

The list-vs-realized gap (returns, markdowns, carrying)

• Returns cut realized margin by 10–20 pts in high-return apparel; realized margin = (1 − return rate) × list margin − processing cost. Online return rates: swimwear/lingerie 25–40%, footwear 25–35%, fashion DTC drops 15–25%, wholesale <5%. Worked: a 65% list-margin SKU at a 30% return rate → ~40% realized before processing (Uphance, as-of 2026-06-27).
• Discounts/markdowns cut realized margin 10–15 pts at typical apparel promo cadence (season discount 15–30%). Worked: $80-list / $25-landed SKU at 69% list margin → ~58% realized at 25% average discount (Uphance, as-of 2026-06-27).
• Carrying cost of slow inventory runs 20–25% of inventory value annually (warehouse, capital, obsolescence), eroding margin via markdowns — Eagle Rock CFO (as-of 2026-06-27). See Markdown Optimisation, Inventory Turnover.

Benchmarks (as-of 2026-01 / 2026-06-27, volatile, mostly vendor)

Apparel — independent aggregate (NYU Stern / Damodaran, Jan 2026)

• 35 US public apparel firms: gross margin 56.88%, operating 9.11%, net 3.85%; COGS/Sales 43.12%, SG&A/Sales 47.62%.
• Adjacent sectors: Shoe 43.88%, Retail (General) 33.18%, Retail (Special Lines) 35.30%, Retail (Grocery/Food) 26.31%, Furniture/Home Furnishings 30.28%; Total Market 37.76%.
• Caveat: skews to large listed firms, not SMB/DTC.

Retail / ecommerce — vendor

• Retail typically 25–40% gross / 2–5% net; specialty (apparel/electronics) 35–50%, e-commerce retail 40–55%, grocery 20–30%, general merchandise 30–40%; private label ~10–15 pts higher than branded (Eagle Rock CFO).
• Mid-market apparel ($5–100M): 50–65% gross on retail, 40–50% on wholesale; net 5–15% (Uphance).

GMROI — margin against inventory

• GMROI = gross margin ÷ average inventory cost; worked: GM $500,000 ÷ inventory cost $200,000 = $2.50 per $1 invested. >$1 profitable but may not cover total costs; $2–$3 often "good". Retail Owners Institute (via Retalon): shoe stores $1.86, electronics $4.07, most apparel $1.50–$3, jewelry ~$1 (as-of 2026-06-08).

• GMROI ignores real-estate/labour/transport/marketing spend (high GMROI can coexist with overall losses) and must be computed at category/SKU level to be actionable (Retalon).

What practitioners report

[!unverified] Both practitioner streams were down this run (reddit-research MCP and Apify YouTube-transcript actor not connected), so no operator/seller counter-narrative on realistic margins or COGS gotchas was collected.

Common mistakes (as reported by Uphance / Eagle Rock CFO)

• Reporting FOB-based not landed-cost margin → overstates margin 15–30%, compounds across reorder/pricing/planning.
• Reporting one blended margin across channels → masks that DTC, wholesale and marketplace differ structurally.
• Using list margin not realized margin → ignores returns/discounts/markdowns, overstates profitability.
• Reading margin without cash conversion → a 30%-margin business with a 180-day cash cycle can be worse off than a 20%-margin one at 60 days.

Frontier / not yet written

Cost of Goods Sold (COGS) · Landed Cost · Realized Margin · Average Order Value (AOV) · Break-Even ROAS · Shrinkage · a UK/Europe or fashion-primary gross-margin benchmark (UNIQLO-Europe gap).