Gross margin is the share of each sales dollar that's left after the direct cost of the thing sold. It's gross profit divided by revenue.
Gross margin is the share of each sales dollar that's left after the direct cost of the thing sold. It's gross profit divided by revenue.
Gross profit is a number of dollars. Gross margin is a percentage. People say margin when they mean either. In this course margin always means the percentage.
A high gross margin means the product costs little to make compared with what it sells for. A low one means most of the price goes to making the thing.
Apple's income statement for the year that ended September 30 2023 splits sales into products and services. In millions.
| Line | Products ($M) | Services ($M) | Total ($M) |
|---|---|---|---|
| Net sales | 298,085 | 85,200 | 383,285 |
| Cost of sales | 189,282 | 24,855 | 214,137 |
| Gross margin in dollars | 108,803 | 60,345 | 169,148 |
Now the percentages. Derived. The arithmetic is here so you can check it.
Products. $108,803 million divided by $298,085 million is 0.365. A 36.5% gross margin. Every iPhone dollar keeps about 37 cents after the parts and the factory.
Services. $60,345 million divided by $85,200 million is 0.708. A 70.8% gross margin. Every App Store or iCloud dollar keeps about 71 cents.
Total. $169,148 million divided by $383,285 million is 0.441. Apple as a whole runs a 44.1% gross margin.
Services is under a quarter of Apple's sales and over a third of its gross profit. That's why Apple talks about services so much.
The trap is confusing margin with markup.
Margin is profit as a share of the selling price. Markup is profit as a share of the cost. Same dollars. Different denominator.
Costco marks goods up by around 10 to 11% on cost. Its gross margin on net sales is about 10.6%. $25,124 million divided by $237,710 million. At low numbers the two look alike. At high numbers they don't. A product that costs $50 and sells for $100 has a 100% markup and a 50% margin.
When someone says margin ask which one they mean.
You're in Apple's finance team. A colleague says the company should stop chasing services because products are three and a half times the revenue.
Find gross profit for each. Use the table.
Products $108,803 million. Services $60,345 million.
Find services as a share of total gross profit.
$60,345 million divided by $169,148 million is 0.357. About 36%.
Find services as a share of total net sales.
$85,200 million divided by $383,285 million is 0.222. About 22%.
Reply to your colleague in one sentence.
Services is 22% of sales and 36% of gross profit. Each services dollar earns about twice what a products dollar earns. Which line would you grow?
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