--- title: An Important Refresher on Driving Operating Margin and Gross Margin description: Operating Margin and Gross Margin are two critical metrics that matter which provide insights in the health and long-term profitability of a business. image: https://www.advantexe.com/hubfs/gross-margin-operating-margin.jpg --- [![logo-advantexe-150.png](https://www.advantexe.com/hs-fs/hubfs/logo-advantexe-150.png?width=150&height=123&name=logo-advantexe-150.png "logo-advantexe-150.png")](https://www.advantexe.com) ![blog-banner-2022](https://www.advantexe.com/hs-fs/hubfs/blog-banner-2022.png?width=973&name=blog-banner-2022.png "blog-banner-2022") ### The Advantexe Advisor Blog - providing a deep and applicable understanding of the system of business. # An Important Refresher on Driving Operating Margin and Gross Margin By Robert Brodo | Oct 7, 2020 8:34:01 AM | [![Share on Facebook](https://static.hubspot.com/final/img/common/icons/social/facebook-24x24.png)](http://www.facebook.com/share.php?u=https%3A%2F%2Fwww.advantexe.com%2Fblog%2Fan-important-refresher-on-driving-operating-margin-and-gross-margin%3Futm_medium%3Dsocial%26utm_source%3Dfacebook) [![Share on LinkedIn](https://static.hubspot.com/final/img/common/icons/social/linkedin-24x24.png)](http://www.linkedin.com/shareArticle?mini=true&url=https%3A%2F%2Fwww.advantexe.com%2Fblog%2Fan-important-refresher-on-driving-operating-margin-and-gross-margin%3Futm_medium%3Dsocial%26utm_source%3Dlinkedin) [![Share on Twitter](https://static.hubspot.com/final/img/common/icons/social/twitter-24x24.png)](https://twitter.com/intent/tweet?original_referer=https%3A%2F%2Fwww.advantexe.com%2Fblog%2Fan-important-refresher-on-driving-operating-margin-and-gross-margin%3Futm_medium%3Dsocial%26utm_source%3Dtwitter&url=https%3A%2F%2Fwww.advantexe.com%2Fblog%2Fan-important-refresher-on-driving-operating-margin-and-gross-margin%3Futm_medium%3Dsocial%26utm_source%3Dtwitter&source=tweetbutton&text=An%20Important%20Refresher%20on%20Driving%20Operating%20Margin%20and%20Gross%20Margin) [![Share on Pinterest](https://static.hubspot.com/final/img/common/icons/social/pinterest-24x24.png)](http://pinterest.com/pin/create/button/?url=https%3A%2F%2Fwww.advantexe.com%2Fblog%2Fan-important-refresher-on-driving-operating-margin-and-gross-margin%3Futm_medium%3Dsocial%26utm_source%3Dpinterest&media=) [![Share on Email](https://static.hubspot.com/final/img/common/icons/social/email-24x24.png)](mailto:?subject=Check%20out%20https%3A%2F%2Fwww.advantexe.com%2Fblog%2Fan-important-refresher-on-driving-operating-margin-and-gross-margin%3Futm_medium%3Dsocial%26utm_source%3Demail%20&body=Check%20out%20https%3A%2F%2Fwww.advantexe.com%2Fblog%2Fan-important-refresher-on-driving-operating-margin-and-gross-margin%3Futm_medium%3Dsocial%26utm_source%3Demail) The participants going through the global pharmaceutical [business simulation](https://www.advantexe.com/why-business-simulations) today listened to the ground![gross-margin-operating-margin](https://www.advantexe.com/hs-fs/hubfs/gross-margin-operating-margin.jpg?width=300&name=gross-margin-operating-margin.jpg) rules that “this is a safe learning environment and there is no such thing as a bad question.” “I am in R&D and I am having a hard time remembering some of these key business metrics like gross margin, operating margin, and which levers to pull to impact them.” I shared a quick response and promised a nice blog for her team and the rest of the cohort developing their [Business Acumen](https://www.advantexe.com/blog/business-acumen-skills-5-most-important-elements-of-a-learning-journey) and Leadership skills this week. For most business professionals, their primary business objectives are to generate as much **profitable revenue** as possible over a sustained long-term period of time. While most non-MBAs understand what revenue is, it is the “profitable revenue” that can sometimes be tricky and needs further defining. Profitable revenue is defined as - *revenue (the price of your product / service multiplied by the volume sold) that is generating a profit* - where profit is equal to the revenues less the expenses incurred to generate those profits. I provide further clarity and examples below. **What is Profit Margin?** To gain a solid understanding of your company’s bottom line, the** profit margin** is an essential metric. *Profit margin measures what percentage of your company’s net income comes from sales*. Because this figure also factors in your business expenses, it measures how well your company can manage expenses relative to the revenue being generated. To calculate profit margin, simply divide net income (profit) by net revenues. These numbers are found on a company’s** income statement**. Here is a quick example: At the end of 2024, Zacora Pharmaceuticals’ net income was $3.1 billion, and their total revenues were $21.5 billion. The profit margin is $3.1 billion divided by $21.5 billion which is equal to 14.4%. Another way of looking at it is that for every $1 of revenue Zacora is generating, they are earning 14.1 cents of profit. While this is a straightforward example, profit margin values and complexity can vary depending on the company because costs can vary greatly. It is important to note that there is no single profit margin number that separates a good profit margin from a bad profit margin. In fact, how good your company’s profit margin is largely depends on your industry and your business strategy. Companies who have [Product Leadership](https://www.advantexe.com/blog/a-product-leadership-go-to-market-marketing-framework) strategies tend to have higher profit margins that those with an [Operational Excellence](https://www.advantexe.com/blog/defining-and-developing-operational-excellence-in-2016-and-beyond) strategy. When looking at different industries in 2020, pharmaceutical companies had some of the highest reported profit margins, with an average of nearly 50%. On the other hand, manufacturing companies had an average profit margin of only 10%. This is likely due to the higher costs for materials and labor compared to pharmaceutical companies which tends to have lower operating costs but much higher R&D costs. When trying to gauge how well your company is performing based on profit margins, look to the average profit margins for your industry. **What is Gross Margin?** Gross Margin is a variation of the profit margin equation that calculates how much profit your company has after accounting for the cost of goods (or services) sold. Cost of goods sold – also known as COGS - includes direct expenses related to the production and sale of a company’s product. This value does not include non-operating expenses such as interest, depreciation, or amortization. In our example from Zacora, the Gross Margin is calculated as: $21.5 billion of revenue less the COGS of $9.5 billion giving you a Gross Margin of $12 billion. When you take the Gross Margin of $12 billion and divide it by the Total Revenue of $21.5 billion, you get the Gross Margin percentage of 56% which is actually a little low for a global pharmaceutical company! Other industries have much lower Gross Margins such as the Retail industry that would be blessed to achieve Gross Margins over 5%. In summary, Operating Margin and Gross Margin are two critical metrics that matter which give you insights in the health and long-term profitability of your business. [![Why Business Acumen Matters ](https://no-cache.hubspot.com/cta/default/1153922/ef562d5a-acb6-45df-86ae-098c09e7fcc0.png)](https://cta-redirect.hubspot.com/cta/redirect/1153922/ef562d5a-acb6-45df-86ae-098c09e7fcc0) ![Robert Brodo](https://www.advantexe.com/hubfs/Blogs/rob-brodo-author.png) **About The Author** Robert Brodo is co-founder of Advantexe. He has more than 20 years of training and business simulation experience. 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