Level 1 · Gross margin by category

What gross margin measures

Gross margin is what is left of sales after paying for the goods that were sold:

• Net sales: what customers paid for the items, after discounts (shipping is not included).
• COGS (cost of goods sold): quantity × the unit cost of each product.
• Gross margin = net sales − COGS, in dollars.
• Gross margin % = gross margin ÷ net sales × 100.

The dollar figure tells you how much a category contributes to paying salaries, rent and marketing. The percentage tells you how much of each sale the store keeps, which is what you compare across categories of very different size.

Compute it from the sums, not the lines

The margin % of a category is total margin divided by total sales, both summed first:

g = costed.groupby("category")
(g["net"].sum() - g["cogs"].sum()) * 100 / g["net"].sum()

Averaging a per-line margin % would give every line the same weight, so a $12 candle would count as much as a $1,600 sofa. The sums weigh each line by its dollars, which is what finance means by the category’s margin.

Missing costs are not zero costs

Nine products have no unit_cost. If you leave them in, cogs is NaN on their lines and pandas sum() skips NaN, so their sales are counted with no cost against them. That turns 961 lines and $596,695 of net sales into pure profit. Drop those lines from both sides of the ratio instead, and write the coverage on the slide: “margin on 90% of net sales; 9 products have no cost on file”.

lines["unit_cost"].isna().sum()   # lines with no cost

Dollars and percent tell different stories

On Harbor & Pine’s history Outdoor sells the most and keeps the least per dollar, yet still earns the most margin dollars. Textiles is the reverse: the smallest sales and the best rate. Neither number alone is “best category”. Put both on the table, sorted by the one the question is about.

Common mistakes

• Counting missing costs as zero. Margin looks higher than it is, and the error hides in a product that is easy to overlook.
• Using list price instead of the price paid. products.unit_price is today’s price; the order line has what the customer actually paid.
• Forgetting discounts. Margin on gross sales overstates what the store keeps on promotions.

Interview note

“What is the difference between gross margin and markup?” Margin divides profit by the selling price; markup divides it by the cost. A product bought for $50 and sold for $100 has a 50% margin and a 100% markup.