One of the most important financial metrics you need to understand is your gross profit. The gross profit is difference between the revenue and the cost of making a product or providing a service. For example, if you sell a widget for $10 that costs you $4 to manufacture, your gross profit on each unit is $6. Gross profit is more commonly expressed as a percentage of revenue, which is called gross margin. In this case, the gross margin on your widget is 60% ($6 gross profit / $10 revenue). There are two ways to improve your gross margin: increase unit revenue or decrease cost.
It almost never makes sense for a startup to compete on price with low margin products. Your competition can tap into its war chests to outspend you. Instead, look for a differentiated product that will allow you to charge a premium, resulting in high gross margins.
Gross margins are so important for startups because higher gross profit creates a financial cushion, which pays your overhead, gives you freedom to experiment, buys you more time, and increases your margin for error. For a startup, gross profit equals survival.
