Is Your Core Business Actually Healthy?
How gross margin gives you the clearest signal
How healthy is our core business? That’s one of the most fundamental questions a company can ask.
Our core business is what we sell. For a car manufacturer, that’s simple: we produce and sell cars. To understand how healthy that business is, we look at what it costs to make those cars — and what we can sell them for.
Here, we’re only interested in the costs that go directly into the product — things like raw materials (e.g. steel) and the labor required to assemble a car. We’re not talking about marketing, sales, or admin expenses.
What Is Gross Profit and Gross Margin?
The gross profit tells us how much money is left after covering the direct costs of making (or buying) the product.
Here’s a simple example:
Our car company sells cars for $200M and has production costs of $160M. That gives us a gross profit of $40M.
To compare this more easily over time or across companies, we usually express it as a percentage — the gross margin. In this case, it’s 20% ($40M ÷ $200M).
But What About Net Profit?
Now you might wonder: why focus on gross profit? Why not just look at net profit, which includes all costs?
Because gross profit zooms in on the company’s core activity — making and selling products. Other costs, like marketing or administration, can vary wildly and may distort the picture. For example, a big marketing campaign might reduce your net profit in one year. But does that mean your core business is weak? Hard to say without digging into the details.
That’s why gross profit often gives a cleaner signal.
Why Gross Margin Matters
A falling gross margin is often an early warning sign. It could mean your production costs are creeping up, or that you’re cutting prices to move more product. And these signs usually show up in gross margin before they show up in net profit.
Spotting this early gives you more time to respond — renegotiate with suppliers, adjust pricing, or rethink your product mix.
Scaling Up? Gross Margin Still Matters
Thinking about scaling your company? Great. But if your gross margin is weak, scaling alone won’t solve the problem. Making more of a low-margin product just multiplies the same issue. That’s why investors often look at gross margin first — it reveals whether your business is ready for growth.
What’s a “Good” Gross Margin?
That depends entirely on the industry.
Heavy Manufacturing companies often have gross margins around 10–20%, since raw materials and machinery are expensive. Consumer Goods Manufacturers often have gross margins around 30-40%.
Retailers typically operate with gross margins around 20-25%, but some businesses, especially grocery chains or discount retailers, can have extremely low margins — as low as 2-3% in some cases. This is a result of their focus on high-volume sales at low prices, where even a small markup makes a difference.
Software companies, on the other hand, may have gross margins of 80% or more. Once the product is built, making one more copy costs next to nothing.
Let’s Talk Cars: Comparing Gross Margins
Even within one industry, gross margins can vary a lot.
Toyota has a gross margin of around 18–20%
Volkswagen sits at about 18–19%
These companies focus on the mass market. They sell regular cars, where pricing power is limited and competition is fierce — and that keeps gross margins lower.
Now compare that to premium brands:
BMW: around 20–22%
Mercedes-Benz: about 22–24%
These companies can charge higher prices, which gives them a bit more margin.
At the luxury end of the spectrum:
Ferrari boasts a gross margin of 47–50%
Ferrari’s customers aren’t just buying transportation — they’re buying a brand, exclusivity, emotion. That gives Ferrari enormous pricing power.
So, Who Has the Advantage?
By looking at gross margin, you can start to answer key questions:
Who has more pricing power?
Who has more room to invest?
Who’s more resilient to cost spikes?
Premium and luxury car makers have higher gross margins because their customers are willing to pay more. That margin gives them more strategic options — and a bigger buffer when things go wrong.
That’s why gross margins matter.
