The Agile Startup: Quick and Dirty Lessons Every Entrepreneur Should Know

Gross Profit Margins

One of the most important financial metrics you need to understand is your gross profit. The gross profit is the difference between the revenue and the cost of making a product or providing a service. For example, if you sell a widget for $10 that costs you $4 to manufacture, your gross profit on each unit is $6. Gross profit is more commonly expressed as a percentage of revenue, which is called gross margin. In this case, the gross margin on your widget is 60 percent ($6 gross profit/$10 revenue). There are two ways to improve your gross margin: increase unit revenue or decrease cost.

It almost never makes sense for a startup to compete on price with low-margin products. Your competition can tap into its war chests to outspend you. Instead, look for a differentiated product that will allow you to charge a premium, resulting in high gross margins.

Gross margins are crucial for startups because higher gross profit creates a financial cushion, which pays your overhead, gives you freedom to experiment, buys you more time, and increases your margin for error. For a startup, gross profit equals survival.

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