What is gross margin?
Revenue minus cost of goods sold (COGS), divided by revenue. The single cleanest signal of pricing power and competitive advantage. Stable or expanding gross margins across cycles point to durable moats; contracting margins point to commodity dynamics or weakening pricing.
Gross margin = (Revenue - COGS) / Revenue. Captures the spread between what customers pay and what it costs to produce the good. Software businesses run gross margins of 70-90% (the marginal cost of one more copy is near zero). Manufacturing runs 25-50%. Commodity producers run 10-25%. Within an industry, the company with the highest gross margin typically has the strongest competitive position - it can absorb input cost shocks, fund higher R&D, and outlast competitors in a price war.
The trend matters more than the level
Comparing absolute gross margins across industries tells you about business-model differences, not relative competitive position. Within an industry, margin trend is the actionable signal: expanding gross margin signals improving pricing power or operating leverage; contracting gross margin signals competitive pressure, input-cost stress, or deteriorating mix.
Buffett has written extensively that the single fastest way to evaluate a business's moat is to look at gross margin stability across full cycles. A business that maintains its gross margin through recessions, raw-material spikes, and currency volatility has demonstrable pricing power.
How invest-like uses it
Gross margin appears inside the Buffett-Fit moat pillar (stable or expanding margin contributes), the Smith framework (Smith requires gross margin above 40% as a quality threshold), and the Piotroski F-Score (margin-improvement is one of the nine binary tests).
Frequently asked questions
What is gross margin?
Revenue minus COGS, divided by revenue. The spread between selling price and direct production cost.
What's a good gross margin?
Industry-dependent. Software 70-90%, consumer staples 30-50%, manufacturing 25-45%, commodity 10-25%. Within-industry trend is the actionable signal.
Why does Buffett care about gross margin?
Because stable gross margin across cycles is the cleanest demonstrable signal of pricing power and moat durability.
Educational only. invest-like is not a registered investment adviser; nothing on this page constitutes personalised investment advice.