Below 20% - thin
Commodity or high-volume, low-margin businesses. Little cushion left for overhead and R&D.
Benchmark
What is a good gross margin?
A good gross margin is generally 40% or higher - it signals real pricing power and a cushion to cover operating costs - but it is deeply industry-dependent. Software routinely clears 70-90%; retailers and manufacturers run 20-40% and are perfectly healthy. What matters most is gross margin relative to direct peers and whether it is stable or expanding over time.
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Short answer
High and stable gross margin is the cleanest sign of pricing power. 40%+ is strong for most industries, 70%+ is software territory, but a 25% margin is normal for a retailer. Falling gross margin is an early warning of competition or rising costs - watch the trend.
How to read a gross margin
20-40% - moderate
Typical for retail, hardware, and many manufacturers. Healthy within those industries.
40-60% - strong
Real pricing power, with comfortable room to fund operating costs and reinvestment.
Above 60% - excellent
Software, brands, and IP-driven businesses. Often the signature of an economic moat.
Why Buffett watches gross-margin stability
A software firm at an 80 percent gross margin and a grocer at 25 percent can both be excellent - the comparison only means something within an industry. A retailer beating its peers' 22 percent with 28 percent has a real edge; a software firm at 55 percent against peers' 80 percent has a problem.
Stability matters as much as level. A consistently high gross margin across years and recessions is evidence of durable pricing power - the moat at work. A margin that drifts down quarter after quarter is the earliest signal of competition or rising input costs, often visible long before it reaches the bottom line.
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Related
- What is gross margin? - the definition and formula behind this benchmark.
- What is operating margin? - the next step down the cascade, after operating overhead.
- What is net profit margin? - the bottom-line margin gross margin ultimately feeds.
- What is an economic moat? - the durable advantage that high, stable gross margins reveal.
See pricing power in the numbers
invest-like shows gross margin and its multi-year stability on every stock - the cleanest read on whether a business can hold its prices.
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