Last Updated on March 20, 2026 by Jason Andrew
Most Founders think they’re profitable.
They’re not.
We consistently see businesses overstate their gross profit margin by 5–15 percentage points. Not because they’re doing anything wrong, but because their cost of sales is wrong.
And if your margin is wrong, every decision built on top of it is wrong too:
- hiring too early
- overspending on ads
- scaling products that don’t actually make money
Gross profit isn’t just a metric. It’s the foundation your entire business runs on.
Get it right, and you can scale with confidence.
Get it wrong, and growth will quietly drain your cash.
What Gross Profit Actually Tells You
At its core, gross profit answers one question:
After delivering what you sold, how much money is left to run the business?
That remaining margin needs to cover:
- marketing and paid acquisition
- sales costs
- overhead and team
- and still leave something for profit
If your gross margin isn’t strong enough, no amount of revenue growth will fix it.
The Formula Is Simple. The Reality Isn’t.
But the formula isn’t where businesses go wrong.
Classification is.
Most businesses don’t have a math problem.
They have a cost allocation problem.
Where Gross Margin Breaks in Real Businesses
eCommerce Brands
Margins are almost always overstated.
Common issues we see:
- shipping and fulfilment not fully captured
- transaction fees sitting in overhead instead of cost of sales
- landed costs not properly accounted for
- discounting not reflected correctly
We’ve seen brands think they’re running at 65% margin when the real number is closer to 50%.
That difference changes everything.
Agencies and Service Businesses
This is where it gets dangerous.
Most agencies:
- under-allocate delivery wages
- exclude freelancers or contractors
- ignore time leakage and utilisation
The result?
They think they have strong margins, but they’re actually underpricing their services.
If your delivery team isn’t properly reflected in the cost of sales, your margin is fiction.
The Real Risk: Scaling a Broken Margin
If your margin is wrong, scaling makes it worse.
You:
- increase ad spend
- hire ahead of demand
- double down on best sellers
But if those products or services aren’t truly profitable, you’re just accelerating cash burn.
We see this all the time:
Revenue is growing. Cash is disappearing. The Founder can’t figure out why.
This is usually a gross margin problem.
What Good Looks Like (And Why It’s Not a Fixed Number)
There’s no universal “good” gross margin.
It depends on:
- your business model
- your pricing strategy
- your cost structure
What matters is this:
You understand your margin clearly and consistently, and you trust the number.
If your margin moves, you should know why within days, not months.
If you can’t break it down by:
- product
- service line
- or channel
you don’t really understand it.
How to Actually Improve Your Gross Profit
- Fix Your Cost of Sales First
Before you try to improve margin, make sure it’s accurate.
That means:
- correctly allocating wages tied to delivery
- capturing all direct product costs
- separating cost of sales from operating expenses
Until this is clean, every improvement is guesswork.
- Reprice With Confidence
Small pricing changes have a disproportionate impact on profit.
When your margin is clear:
- you can increase prices strategically
- you can remove unnecessary discounting
- you can anchor higher value offers
Even a 3–5% price increase can significantly improve profitability.
- Cut Hidden Leakage
Margin erosion rarely comes from one big issue.
It comes from:
- supplier creep
- rising freight costs
- inefficient delivery
- poor utilisation
Individually small. Collectively significant.
- Sell More of What’s Actually Profitable
Not all revenue is equal.
Your:
- best-selling product
- biggest client
- fastest-growing service is often not your most profitable.
- Get Inventory and Cash Flow Working Together
Too much stock:
- ties up cash
- increases risk of write-offs
Too little:
- creates stockouts
- limits growth
The Bottom Line
Gross profit margin isn’t just another financial metric.
It’s the engine of your business.
If it’s wrong, everything built on top of it is unstable.
If it’s clear and accurate, you can make decisions with confidence and scale without guessing.
Where SBO Comes In
Most Founders don’t have a margin problem.
They have a visibility problem.
We help businesses:
- rebuild their cost of sales properly
- get clear, reliable margin reporting
- connect margin to hiring, pricing, and growth decisions
If you’re not confident in your numbers, that’s the first thing to fix.
Want to understand if your margins are actually accurate, or quietly costing you?
👉 Book a call with SBO. We’ll break down your cost of sales, your true gross profit, and where you can unlock stronger, more reliable profitability.
