Gross Margin Benchmarks by Industry: What Good Looks Like
Understand what "good" gross margins look like for your industry—and how to move toward best-in-class performance.
Key Takeaways
- •Gross margin benchmarks vary dramatically by industry—from 15-25% in distribution to 70-85% in software
- •Your margin trend matters more than hitting an arbitrary benchmark number
- •Calculate gross margin correctly: include all direct costs, exclude overhead
- •Best-in-class companies within each industry typically achieve 5-15 percentage points above average
- •Improving gross margin requires working on pricing, costs, and product mix simultaneously
"Is my gross margin good?" It's one of the most common questions business owners ask their financial advisors—and one of the hardest to answer without context.
A 25% gross margin would be excellent for a distribution business and concerning for a professional services firm. Without industry context, margin numbers are meaningless. With the right benchmarks, they become powerful diagnostic tools.
This guide provides gross margin benchmarks across major industries, explains why these benchmarks differ, and offers practical strategies for moving your margins toward best-in-class performance.
Calculating Gross Margin Correctly
Before comparing your margins to benchmarks, ensure you're calculating gross margin correctly. Inconsistent Cost of Goods Sold (COGS) definitions are a common source of confusion.
Gross Margin Formula
Gross Margin % = (Revenue - COGS) / Revenue x 100
Example:
Revenue: $10,000,000
COGS: $6,500,000
Gross Margin = ($10M - $6.5M) / $10M = 35%
What Belongs in COGS?
Include in COGS
- • Raw materials and components
- • Direct labor (production/delivery staff)
- • Manufacturing overhead (factory costs)
- • Freight-in (shipping to receive goods)
- • Subcontractor costs (if part of delivery)
- • Direct commissions on sales
Exclude from COGS
- • Sales and marketing expenses
- • General administrative overhead
- • Corporate office rent
- • Executive salaries
- • Research and development
- • Interest and financing costs
Consistency Matters Most
The most important thing is consistency in how you define COGS. If you shift costs between COGS and operating expenses, your gross margin trends become meaningless. Establish clear definitions and stick with them.
Gross Margin Benchmarks by Industry
The following benchmarks represent typical ranges for established businesses in each sector. "Average" represents the median performer, while "Best-in-Class" represents the top quartile.
Professional Services (Consulting, Accounting, Legal, Marketing)
Below Average
<50%
Average
55-65%
Best-in-Class
70%+
Why these margins: COGS is primarily professional labor. High margins reflect the value premium of expertise. Variance comes from utilization rates (billable hours as % of total), billing rates, and leverage (ratio of junior to senior staff).
Key drivers: Utilization rate, average billing rate, staff leverage, project management efficiency, scope creep control.
Manufacturing
Below Average
<25%
Average
30-40%
Best-in-Class
45%+
Why these margins: Significant material and labor costs limit margins. Variance depends on product complexity, automation level, and whether products are commoditized or differentiated. Custom/engineered products achieve higher margins than commodity manufacturing.
Key drivers: Material costs, labor efficiency, production yield, capacity utilization, product differentiation, pricing power.
Distribution / Wholesale
Below Average
<18%
Average
20-28%
Best-in-Class
32%+
Why these margins: Distributors are moving other companies' products, limiting value-add. Margins reflect the service component (availability, delivery, technical support) rather than product transformation. Higher margins come from exclusive relationships, value-added services, or specialized expertise.
Key drivers: Supplier pricing, customer mix, value-added services, private label products, inventory management, freight efficiency.
Retail
Below Average
<30%
Average
35-45%
Best-in-Class
50%+
Why these margins: Retail margins vary dramatically by category. Grocery operates at 25-30%, while apparel and specialty retail can reach 50-60%. The margin reflects how much curation, service, and experience the retailer adds versus pure price competition.
Key drivers: Product category, brand mix, shrinkage control, markdown management, private label penetration, vendor negotiations.
Construction / Contracting
Below Average
<15%
Average
18-25%
Best-in-Class
30%+
Why these margins: High material and labor content, competitive bidding, and project-based risk compress margins. Specialty trades (electrical, mechanical) typically achieve higher margins than general contractors. Design-build and specialized niches can reach 30%+.
Key drivers: Estimating accuracy, change order management, labor productivity, subcontractor relationships, project selection discipline.
Healthcare Services (Medical Practices, Clinics, Home Health)
Below Average
<40%
Average
45-55%
Best-in-Class
60%+
Why these margins: Healthcare services are labor-intensive with highly credentialed (expensive) professionals. Margins depend heavily on payer mix (commercial insurance vs. Medicare vs. self-pay), operational efficiency, and ancillary service revenue.
Key drivers: Payer mix, provider productivity, denial management, coding optimization, ancillary services, staffing efficiency.
Summary: Gross Margin Benchmarks
| Industry | Below Average | Average | Best-in-Class |
|---|---|---|---|
| Professional Services | <50% | 55-65% | 70%+ |
| Manufacturing | <25% | 30-40% | 45%+ |
| Distribution / Wholesale | <18% | 20-28% | 32%+ |
| Retail | <30% | 35-45% | 50%+ |
| Construction / Contracting | <15% | 18-25% | 30%+ |
| Healthcare Services | <40% | 45-55% | 60%+ |
| Software / Technology | <65% | 70-80% | 85%+ |
| Food & Beverage (Manufacturing) | <25% | 28-35% | 40%+ |
Why Benchmarks Vary: Understanding Your Industry's Economics
Gross margin differences between industries aren't arbitrary—they reflect fundamental economic realities.
1Value Creation vs. Value Distribution
Businesses that transform inputs significantly (manufacturing, professional services) capture more margin than those that primarily move or resell products (distribution, retail). The more value you create, the more margin you can capture.
2Capital Intensity
Capital-intensive businesses (manufacturing, construction) have higher costs that flow through COGS. Asset-light businesses (software, consulting) have lower direct costs and higher gross margins—though they may have significant operating expenses.
3Differentiation Potential
Industries with significant differentiation opportunities (professional services, specialty manufacturing) support higher margins. Commodity businesses where products are interchangeable face more price pressure and lower margins.
4Competitive Dynamics
Industries with many competitors and low switching costs (retail, distribution) see margins compressed by competition. Industries with higher barriers to entry or significant customer switching costs can maintain stronger margins.
5Customer Concentration
Industries where customers are large and concentrated (construction GCs working for developers, manufacturing suppliers to OEMs) face more pricing pressure than those with fragmented customer bases. Large customers extract concessions.
The Benchmark Paradox
Understanding why your industry has the margins it does helps identify where there's room to move. If you can create more differentiation, reduce competitive intensity in your niche, or change your customer mix, you can potentially exceed industry benchmarks rather than simply meeting them.
Strategies to Improve Gross Margins
Improving gross margin requires simultaneous work on pricing, costs, and mix. The following strategies apply across industries, though the specific tactics vary.
Pricing Strategies
- Raise prices where value supports it: Many businesses underprice their best products or services. Review pricing against value delivered, not just cost-plus formulas.
- Reduce discounting: Track average realized price vs. list price. Implement discount approval processes and train sales teams on value selling.
- Implement price increases with cost increases: Don't absorb material or labor cost increases. Pass them through with appropriate communication.
- Segment pricing: Different customers may have different willingness to pay. Use pricing tiers, bundling, or customer-specific pricing where appropriate.
Cost Reduction Strategies
- Negotiate with suppliers: Regular supplier reviews, competitive bidding, and volume consolidation can reduce material costs 3-10%.
- Improve labor productivity: Track labor efficiency metrics, invest in training, and eliminate low-value activities.
- Reduce waste and rework: Quality issues destroy margin. Root-cause analysis and process improvement pay dividends.
- Optimize logistics: Freight costs, inventory carrying costs, and warehouse efficiency all impact COGS.
Mix Optimization Strategies
- Identify your profit leaders: Analyze gross margin by product, service line, or customer segment. Know where you make money.
- Steer sales effort toward high-margin offerings: Sales incentives, lead routing, and marketing spend should favor profitable products.
- Prune low-margin products or customers: Sometimes the best margin improvement comes from eliminating unprofitable business.
- Develop premium offerings: Higher-tier products or services often carry higher margins. Invest in moving up-market.
A 12-Month Margin Improvement Roadmap
Sustainable margin improvement takes time. Here's a realistic roadmap for moving from average to best-in-class performance.
Months 1-3: Foundation and Quick Wins
- • Ensure COGS is calculated correctly and consistently
- • Build margin reporting by product/service and customer
- • Implement price increase on most underpriced products (immediate impact)
- • Reduce discounting with new approval processes
- • Target: 1-2 percentage point improvement
Months 4-6: Operational Improvements
- • Complete supplier review and renegotiations
- • Implement productivity improvements
- • Address quality issues driving waste/rework
- • Begin shifting sales mix toward higher-margin offerings
- • Target: Additional 1-2 percentage point improvement
Months 7-12: Structural Changes
- • Exit unprofitable products or customer segments
- • Launch higher-margin premium offerings
- • Complete process redesign for efficiency gains
- • Embed margin discipline in planning and incentives
- • Target: Additional 2-3 percentage point improvement
Realistic Expectations
A well-executed margin improvement program can achieve 4-7 percentage points of gross margin improvement over 12-18 months. This translates directly to bottom-line profit—for a $20M revenue company, each percentage point of gross margin improvement adds $200K to profit.
Tracking Your Progress
You can't improve what you don't measure. Implement these tracking mechanisms to ensure sustained margin improvement.
Monthly Margin Dashboard
| Metric | What to Track | Warning Signs |
|---|---|---|
| Overall gross margin % | Monthly trend, vs. prior year | Declining for 3+ consecutive months |
| Gross margin by product line | Top 5-10 product categories | Any category below industry average |
| Gross margin by customer | Top 20 customers quarterly | Large customers with below-average margins |
| Price realization | Actual price vs. list price | Average discount exceeding 10% |
| Material cost variance | Actual vs. standard costs | Unfavorable variance trend |
| Labor efficiency | Hours per unit or utilization rate | Productivity below target |
Monthly Margin Review Meeting
Schedule a monthly review focused specifically on gross margin performance. The agenda should include:
- Review overall margin vs. prior month and prior year
- Discuss margin variances by product line and customer
- Review pricing actions taken and their impact
- Update on cost reduction initiatives
- Identify new margin improvement opportunities
- Assign action items with owners and deadlines
Frequently Asked Questions
What is gross margin and how is it calculated?
Gross margin is calculated as (Revenue - Cost of Goods Sold) / Revenue, expressed as a percentage. For example, if you sell a product for $100 and the direct cost to produce or acquire it is $60, your gross margin is 40%. Gross margin measures the efficiency of your production or service delivery before accounting for overhead expenses.
Why do gross margins vary so much between industries?
Gross margins reflect the fundamental economics of each business model. Service businesses have high margins because their 'cost of goods sold' is primarily labor, which they can leverage. Distribution businesses have low margins because they're primarily moving products others manufacture. Capital-intensive manufacturing falls in between. The margins also reflect competitive dynamics and the value customers place on differentiation.
Should I compare my gross margin to the industry average or best-in-class?
Compare to both, but understand what drives the difference. The industry average shows what's 'normal' given typical competitive dynamics. Best-in-class shows what's possible with superior pricing power, operational efficiency, or a differentiated business model. Your target should depend on your strategy—are you competing on price (expect lower margins) or differentiation (aim higher)?
What's included in Cost of Goods Sold (COGS)?
COGS should include all direct costs of producing goods or delivering services: raw materials, direct labor, manufacturing overhead, shipping costs to receive goods, and any other costs that vary directly with production volume. It should NOT include sales, marketing, administrative overhead, or general facility costs. Consistent COGS definition is essential for accurate margin analysis.
How quickly can I improve my gross margin?
Quick wins (pricing adjustments, eliminating unprofitable products) can show results in 1-3 months. Operational improvements (efficiency gains, supplier renegotiation) typically take 3-6 months. Structural changes (product redesign, manufacturing process changes) may take 6-18 months. A realistic improvement plan targets 2-5 percentage points over 12-24 months through multiple initiatives.
Is a higher gross margin always better?
Not necessarily. Gross margin must be considered alongside volume and market share. A business with 30% gross margin and high volume may generate more profit than one with 50% gross margin and low volume. Some industries (distribution) compete on efficiency with thin margins. The goal is the margin level that maximizes total profit given your competitive strategy.
How does product mix affect gross margin?
Product mix can have a larger impact on gross margin than most companies realize. If 30% of your products have 50% margins and 70% have 25% margins, shifting the mix by just 10 percentage points toward the higher-margin products improves blended gross margin by 2.5 points. Tracking margin by product or service line, and steering sales effort accordingly, is one of the fastest ways to improve overall margins.
What's the relationship between gross margin and pricing power?
Gross margin is largely a reflection of pricing power—the ability to charge prices above your costs. Pricing power comes from differentiation, customer switching costs, brand strength, or limited competition. Businesses with strong pricing power maintain margins during cost increases and market downturns. Those without pricing power see margins compress when competition intensifies.
Need Help Improving Your Gross Margins?
Eagle Rock CFO helps growing businesses analyze their margins, identify improvement opportunities, and implement strategies to reach best-in-class profitability. From margin diagnostics to pricing strategy to cost optimization, we bring CFO-level financial expertise to companies ready to improve their bottom line.
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