Gross margin = (revenue − cost of sales) ÷ revenue
($15,000 − $6,000) ÷ $15,000 = 60 percent
Why are ads paid from margin and not from revenue?
Because the revenue is already spoken for. When a $100 sale costs $70 in stock, only $30 is left to pay for the ad that brought the customer in, and the rent, and you. Ad accounts report revenue, so a campaign that turned $1,000 into $3,000 of sales looks like a win. At a 30 percent margin it produced $900 of gross profit for $1,000 of ads, and lost $100.
This is the sum behind break-even ROAS: divide 1 by your gross margin and you get the return your ads must beat before they make anything at all.
Is a 50 percent markup a 50 percent margin?
No, and the mix-up costs owners money. Markup is worked out on the cost. Margin is worked out on the price. A product that cost you $100 and sells for $150 has a 50 percent markup and a 33 percent margin, because the $50 is a third of the $150 sale. Plan ads on the markup by mistake and every sum downstream comes out too generous.
Which half of a Newcastle bike shop can afford the ads? (example figures)
A bike shop in Newcastle has two sides: the floor, selling new bikes, and the workshop, servicing them. The owner splits the last month's profit and loss in two.
| New bikes | Workshop | |
|---|---|---|
| Sales (no GST) | $45,000 | $15,000 |
| Cost of sales | $31,500 for the bikes | $6,000 for parts and the mechanic's wages |
| Gross profit | $13,500 | $9,000 |
| Gross margin | 30 percent | 60 percent |
| Break-even ROAS (1 ÷ margin) | 3.33 | 1.67 |
Put $100 of ads behind each half and suppose each brings in $300 of sales. On the floor, $300 at 30 percent is $90 of gross profit, so the ads lost $10. In the workshop, the same $300 at 60 percent is $180, so the ads made $80. Same ad result, opposite verdicts. The owner moves most of the budget to servicing, which has a second advantage: a workshop customer comes back every year or so, and a bike buyer may not return for a decade.
Notice what went into the workshop's cost of sales. The mechanic's wages count, because the mechanic is the product. The person on the front counter does not, because the counter would be staffed with or without that service.
Why can CoraVision not see your margin?
No account CoraVision connects to holds your margin, because Google Ads, Meta and Google Analytics 4 see sales, not the cost of the stock behind them. CoraVision reads the spend and the conversion value from those accounts every night, and when a ROAS target is among the items in your Marketing Performance score, the margin you work out from your own books is what decides where that target should sit.
Questions
What is a normal gross margin for a small business?
There is no normal. A bottle shop and a bookkeeper live on very different margins, and both can be healthy. Use your own: the gross profit line on your profit and loss report in Xero or MYOB, divided by your sales for the same period.
Is gross margin the same as profit?
No. Gross margin is what is left before rent, admin wages, insurance, software and the ads themselves. Net profit is what is left after all of them. A business can have a fat gross margin and still lose money if its overheads are bigger than its gross profit.
Should GST be in the sum?
No. Work out margin on sales and costs without GST, because the GST was collected for the tax office and was never part of what the business earned. Setting a GST-inclusive price against a GST-free cost makes a 40 percent margin look like 45 percent.