Gross margin is the percentage of revenue remaining after deducting the direct costs of producing or delivering your product or service. It is the single most important commercial metric for a UK SME.
Worked Example — UK SME
Revenue: £500,000. Cost of goods sold (COGS): £320,000. Gross profit = £180,000. Gross margin = (180,000 ÷ 500,000) × 100 = 36%.
UK Benchmark
📊 UK sector benchmarks vary significantly: Distribution 12–28%, Retail 30–48%, Manufacturing 25–44%, Service 45–62%, Hospitality 55–70%.
Common Questions
What costs should I include in COGS for UK gross margin?
Include all direct costs: materials, stock purchased for resale, direct labour (staff who make or deliver the product), freight and delivery costs, import duty, packaging, and any other cost that directly varies with each unit sold. Do not include rent, admin salaries, or marketing.
Why is my gross margin lower than my competitors?
Common causes include: not including all landed costs (freight, duty) in COGS, underpricing relative to the market, poor product mix (too many low-margin lines), or supplier costs that have risen faster than selling prices. A full pricing review is usually the fastest fix.
What is a good gross margin for a UK SME?
It depends heavily on your sector. A distribution business at 22% gross margin is healthy. A service business at 22% has a serious problem. Always benchmark against your specific sector rather than a universal target.