Knowing what counts as a good gross profit margin starts with a familiar puzzle. Your turnover grew by 15% last year. So why does the bank balance feel exactly the same? For many South African owners, the answer sits in one number most people glance past: gross profit margin.
So, what is a good gross profit margin? The honest answer, however, is that it depends on your industry, your model and your costs. For example, a 25% margin can be healthy for a distributor and a warning sign for a consultancy.
This guide shows you how to work out gross profit margin with a simple Rand example, how it differs from net margin and markup, what published benchmarks by industry actually say, and the practical ways to lift your margin without chasing more sales.
What is gross profit margin?
Gross profit margin tells you what percentage of every Rand of sales is left after you pay for the direct cost of what you sold. That leftover amount is what pays your rent, salaries, fuel, software and, eventually, your profit.
Direct costs, usually called cost of goods sold (COGS) or cost of sales, include things like:
- Stock or raw materials you buy and resell or process
- Direct labour that goes into making the product or delivering the job
- Freight in, import duties and packaging linked to the product
- Subcontractors on a specific project
Overheads such as office rent, admin salaries and marketing don’t belong in COGS. They come off later, on the way to net profit.
Gross profit margin formula (and how to work it out)
Before you can judge what a good gross profit margin is, you need the formula. It has two steps:
- Gross profit = Revenue − Cost of goods sold
- Gross profit margin (%) = (Gross profit ÷ Revenue) × 100
A worked Rand example
Picture a Pretoria building-supplies business with these annual figures:
| Line item | Amount |
|---|---|
| Revenue (excl. VAT) | R12,000,000 |
| Cost of goods sold | R8,400,000 |
| Gross profit | R3,600,000 |
| Operating expenses (salaries, rent, vehicles, admin) | R2,700,000 |
| Net profit before tax | R900,000 |
Gross profit margin = R3,600,000 ÷ R12,000,000 × 100 = 30%.
In plain terms, for every R100 this business sells, R70 goes to paying for the goods and R30 is left to cover overheads and profit. After R2.7 million of overheads, the net margin is R900,000 ÷ R12,000,000, or 7.5%.
Two practical tips when you work this out for your own business. Always use revenue excluding VAT. And make sure your bookkeeper posts direct costs to cost of sales consistently every month, otherwise your margin will jump around for reasons that have nothing to do with trading.
Gross margin vs net margin vs markup
These three numbers get mixed up all the time, and the confusion costs money. The most common mistake is pricing with a markup while thinking it’s a margin.
| Measure | Formula | What it tells you | Example above |
|---|---|---|---|
| Gross profit margin | Gross profit ÷ Revenue | How much of each sale is left after direct costs | 30% |
| Net profit margin | Net profit ÷ Revenue | How much of each sale is left after all costs | 7.5% (before tax) |
| Markup | Gross profit ÷ Cost of goods sold | How much you add on top of cost when setting a price | 42.9% |
Markup is always higher than margin for the same product. So if you add 30% to cost and assume you’re making a 30% margin, you’re actually making about 23%. Here’s a quick conversion:
- 25% markup = 20% gross margin
- 33% markup = 25% gross margin
- 50% markup = 33% gross margin
- 100% markup = 50% gross margin
Good gross profit margin by industry: what the data shows
Benchmarks help you judge a good gross profit margin, but only if you know where they come from. There is no single official table of gross margins for South African SMEs, so be wary of any website quoting precise “SA averages” without a source.
The most widely used public dataset is maintained by Professor Aswath Damodaran at NYU Stern, who publishes margins by industry sector. The figures below come from his January 2026 update, which covers US-listed companies.
| Industry (Damodaran classification) | Gross margin | Net margin |
|---|---|---|
| Software (system & application) | 71.7% | 25.5% |
| Machinery | 37.5% | 10.6% |
| Business & consumer services | 33.4% | 7.0% |
| Retail (general) | 33.2% | 5.6% |
| Restaurant/dining | 32.2% | 9.4% |
| Building materials | 30.9% | 7.4% |
| Retail (distributors) | 30.6% | 6.1% |
| Retail (grocery and food) | 26.3% | 1.3% |
| Food processing | 23.2% | 2.8% |
| Trucking | 21.2% | 3.8% |
| Engineering/construction | 15.5% | 5.9% |
| Total market (all sectors) | 37.8% | 9.7% |
Source: Aswath Damodaran, NYU Stern, “Operating and Net Margins by Industry Sector”, US data as of January 2026. Figures rounded to one decimal.
Read these benchmarks with care
- They are large, listed US companies. Scale buys purchasing power, so an SME’s gross margin in the same sector may be lower, or higher if it serves a profitable niche.
- What counts as COGS varies. One business puts delivery drivers in cost of sales; another puts them in overheads. That alone can shift gross margin by several points.
- Business models differ within a sector. For example, a specialist engineering consultancy and a civils contractor sit in very different margin ranges.
- Your own trend matters more. A margin sliding from 32% to 28% over two years tells you more than any industry average.
A South African lens
Stats SA doesn’t publish gross margins by industry, but its Annual Financial Statistics for 2024 show how thin the bottom line is across the formal business sector. Total turnover was about R15.7 trillion, and net profit before tax about R856 billion. That works out to a pre-tax margin of roughly 5.5% (our calculation from the published figures). For manufacturing it was about 4.6%, and for construction about 5.3%.
With net margins that tight, a few points of gross margin is often the difference between a business that funds its own growth and one that lives on the overdraft. That is why a good gross profit margin matters so much.
So, what is a good gross profit margin for your business?
Rather than chasing a single figure, ask three questions to test whether yours is a good gross profit margin.
- Does it cover your overheads with room to spare? If your overheads are 25% of revenue, a 27% gross margin leaves just 2% for profit, tax and reinvestment. That’s fragile.
- Is it in a sensible range for your type of business? Use the benchmarks above as a rough guide. Distribution and construction often run on lower gross margins with high volumes. By contrast, services and software run higher.
- Is it stable or improving? Track it monthly. A falling margin is an early warning that costs are creeping up, discounts are creeping in, or your product mix is shifting.
A useful rule of thumb: work out your break-even margin by dividing your fixed overheads by revenue. A good gross profit margin sits comfortably above that line.
Want to see how your margins and financial health compare with the rest of your business? Take the free Business Health Check for a quick read on profitability, cash flow and where to focus first.
How to improve your gross profit margin
There are only three levers: what you charge, what you sell, and what it costs you. Here’s how SMEs can pull each one to reach a good gross profit margin.
1. Pricing
Pricing is the most powerful lever, and often the least used. McKinsey’s classic analysis of S&P 1500 companies found that a 1% price rise, with stable volumes, would lift operating profits by about 8%.
In our example business, a 1% price increase adds R120,000 of revenue with no extra cost. As a result, net profit moves from R900,000 to R1,020,000, a 13% jump.
- Review prices at least once a year, not only when suppliers push theirs up.
- Put limits on discounting and track who gives discounts and how often.
- Charge separately for extras you currently give away: delivery, rush jobs, small orders, extended payment terms.
2. Product and customer mix
Your average margin hides big differences. Some products, services or customers earn 45% while others barely earn 10%.
- Work out gross margin per product line and per major customer.
- Then push sales effort and incentives towards higher-margin lines.
- Reprice or drop consistently low-margin work unless it brings in profitable follow-on business.
3. Cost of goods sold
- Renegotiate with your top five suppliers, or consolidate volume for better terms.
- Cut waste, rework and stock write-offs. After all, shrinkage and damaged stock go straight to COGS.
- Measure labour productivity on jobs. Otherwise, overruns on quoted jobs quietly eat margin.
- Manage currency exposure on imports where the Rand moves against you.
Our article on how a profitability consultant can transform your business also goes deeper into finding and fixing profit leaks. And if waste is your issue, see how to eliminate the 7 types of waste in business operations.
Frequently asked questions
What is a good gross profit margin for a small business?
There is no universal figure. It depends on your industry and overhead structure. Distributors and contractors often work on 15% to 30%, while services and software can run far higher. A good gross profit margin covers your overheads comfortably, leaves room for profit, and is stable or improving over time.
How do you work out gross profit margin?
Subtract cost of goods sold from revenue to get gross profit. Then divide gross profit by revenue and multiply by 100. For example, revenue of R1,000,000 and COGS of R650,000 gives gross profit of R350,000 and a gross profit margin of 35%. Always use revenue excluding VAT.
What is the difference between gross margin and markup?
Gross margin is gross profit as a percentage of the selling price. Markup, by contrast, is gross profit as a percentage of cost. For the same product, markup is always higher. A 50% markup equals a 33% gross margin. Pricing with markup while targeting a margin is a common cause of under-pricing.
Is a 20% gross profit margin good?
It can be. For distribution, construction, trucking or food businesses, 20% is within the ranges published benchmarks show. For services or software it would be low. What matters most is whether 20% covers your overheads and still leaves a sustainable profit.
Your next step: know your margin every month
Gross profit margin is one of the simplest numbers in your business and one of the most useful. So calculate it monthly, by product line if you can, and watch the trend.
Start with the free Business Health Check to see where your financial health stands. If you’d like help finding where margin is leaking, book a 30-minute call with Yushini.
If you want your margins, targets and actions tracked in one place, see how Edvysor for SMEs keeps your numbers and your plan connected.
