Gross Margin
You charge $15k for the engagement. How much is left after you've paid for the direct cost of delivering it? Gross margin is revenue minus direct costs (COGS), expressed as a percentage. The direct costs are what it takes to deliver one unit: your time (or your team's), materials, contractor fees. Gross margin is the money left after delivery—before overhead, admin, and other fixed costs. Higher margins give you more room to invest in growth and to absorb shocks.
Same revenue, different margin. Two consultants each do $200k revenue. One has 70% gross margin: delivery cost is 30% of revenue (labor, subcontractors). The other has 45% gross margin: delivery cost is 55%. The first has $140k after delivery to cover overhead and profit; the second has $90k. Gross margin is the first filter on profitability. If it's too low, you can't scale without either raising prices or cutting delivery cost (e.g. operational efficiency, team leverage).
Revenue minus direct cost of delivery, as a %. Track it by offer so you know which work is worth scaling.
How to calculate it
Formula: (Revenue − COGS) ÷ Revenue = Gross margin %.
COGS = direct cost to deliver: labor (your time and team's at cost), subcontractors, materials that go into the deliverable. Not overhead (rent, software, admin) and not your "salary" as profit—your cost to deliver this engagement.
Example: Engagement revenue $20k. Your time 15 hours at $150/h effective cost = $2,250; associate 10 hours at $50/h = $500; no materials. COGS = $2,750. Gross margin = ($20k − $2,750) ÷ $20k = 86.25%.
Why it matters for scaling
Pricing. If your gross margin is 40%, you have little room for sales and marketing, overhead, and profit. Raising prices (e.g. value pricing) or improving delivery efficiency can push margin up so you can reinvest.
Which offers to scale. Some offers have high gross margin; others don't. Track margin by offer or by client. Scale the ones that are profitable; fix or drop the ones that aren't. Many domain experts discover one "favorite" offer has the worst margin—and that's a scaling trap.
Room for growth. High gross margin means you can spend on acquisition, tools, and team without eating into survival. Low margin means growth spend hurts. Improve margin first, then scale.