Gross margin is the difference between your revenue and the cost of your goods or services. It indicates how profitable your business is. The gross margins I recommend below are after accounting for your marketing and sales expenses.

When starting, I was suggested to use margins from public companies as a reference. But I couldn’t match those margins as I don’t have the same structural benefits. Instead, those margins helped me to figure out how much customers are willing to pay for similar products or services.

Based on my experience of working across multiple businesses, I use a simple rule to determine gross margins for any new product or service:

For services, aim for a 20% margin. This will give you about 6-8% profit after paying for all your expenses, including working capital. Sometimes you may get opportunities to work at 4-5% lower margins than usual. These are okay if you don’t have to spend anything extra to deliver the service. But for such low margins, make sure you get paid upfront to reduce risk.

For products, aim for a 25% margin and keep 5% for warranty and replacement costs. Going below 15% is risky because you may have to spend 5% on warranty and service claims. That leaves only a 10% margin to cover your expenses and make a profit.

Big organisations may work with lower margins for various reasons, but you can’t when you’re starting. If you want to start a new business, check if you can get similar margins. If not, look for something else because it may not be worth it.