What is Gross Margin? — Definition for DTC operators

Definition

Gross margin is revenue minus cost of goods sold (COGS), expressed as a percentage of revenue. COGS includes product cost, inbound freight, duties, and per-unit fulfillment — but not marketing spend, headcount, or platform fees.

How operators actually use it

DTC operators target 65-75% gross margin on premium consumables, 50-60% on apparel, and 70-80% on digital. Your gross margin is the budget you have to spend on every other line item — paid acquisition, payroll, software, returns. A brand with 40% gross margin and a 3x ROAS target is structurally fragile because a tiny ad-cost increase wipes the contribution. Healthy gross margin is what gives you optionality during a downturn.

Common pitfalls and honest-cost notes

Brands routinely forget to load inbound freight, duty, and per-unit packaging into COGS, overstating gross margin by 5-10 points. Another trap is using last-month's gross margin while your COGS is climbing from a vendor price hike — by the time you see it in the P&L, you've spent two months acquiring customers at the wrong unit economics.

Related terms

Contribution Margin — Contribution margin is revenue minus all variable costs to deliver that revenue — COGS, payment processing, fulfillment, last-mile shipping, and the specific marketing spend that produced the order.
CAC (Customer Acquisition Cost) — CAC is the total cost to acquire a new customer, calculated as marketing spend divided by new customers acquired in the same window.
LTV (Lifetime Value) — LTV is the projected total revenue a customer will generate over their relationship with your brand.
ROAS (Return on Ad Spend) — ROAS is revenue divided by ad spend, usually reported per platform (Meta ROAS, Google ROAS) and as a blended figure across all paid channels.
MER (Marketing Efficiency Ratio) — MER is total revenue divided by total marketing spend across all channels — paid, agency fees, creator partnerships, email tools, the works.