What Is Gross Margin and How It Reflects Profitability | Updated Guide

Key Takeaways
 

• Higher gross margins offer financial flexibility, allowing businesses to reinvest in marketing, product development, and expansion without depending heavily on funding.
   
• Falling gross margins can highlight underlying problems, even if revenue is growing. It often signals pressure on pricing, costs, or product-market fit.
   
• Scalability and gross margin go together. A scalable fintech model tends to have high gross margins with low marginal costs, which ensures growth leads to real profit.
   

BONUS: METRO BRANDS HAS EXPANDED TO 28 NEW STORES ACROSS 206 CITIES WHILE MAINTAINING A STRONG GROSS MARGIN OF 60%. THE COMPANY IS NOW FOCUSING ON NEW BRANDS AND SMALL-TOWN GROWTH TO CONTINUE ITS UPWARD TREND.

Gross margin is the percentage of revenue a business keeps after paying for the direct costs of making its products or services.

Let's understand with an example of Ravi Sharma runs a small fintech start-up that provides online payment solutions. In one month, his company earns ₹10,00,000 in revenue from customer transactions. The cost of goods sold, which includes payment processing fees and server costs, comes to ₹4,00,000. 

After subtracting these costs from the total revenue, Ravi has a gross profit of ₹6,00,000. To find the gross margin, the gross profit is divided by the revenue and then multiplied by 100. This gives him a gross margin of 60%. This means that for every ₹100 earned, his company keeps ₹60 before paying for salaries, rent, marketing, and other business expenses.

In this blog, we will explore what gross margin means, how it is calculated, why it matters in the fintech industry, and ways companies can improve it.

What Is Gross Margin?

Gross margin is the share of revenue a company keeps after paying for the direct cost of making or delivering its products or services. It is shown as a percentage and helps understand how much money is left to cover other expenses and profit.

Formula and Calculation of Gross Margin

Gross margin is calculated by finding the difference between total revenue and the cost of goods or services sold, then dividing that number by the revenue and multiplying by 100 to get a percentage.

In simple words, first work out how much money is left after covering the cost of producing the product or service. Then see what part of the total revenue this leftover amount represents.

Mathematical Form

Gross Margin (%) = (Revenue – COGS) ÷ Revenue × 100

Step-by-Step for Ravi Sharma’s Example

 

1. Revenue = ₹2,00,000
    
2. COGS = ₹1,00,000
    
3. Gross Profit = ₹2,00,000 – ₹1,00,000 = ₹1,00,000
    
4. Gross Margin (%) = ₹1,00,000 ÷ ₹2,00,000 × 100 = 50%

Formula Application with Different Revenue and COGS Figures

Here is how the gross margin formula works when applied to companies with different revenue and cost levels:
 

This table shows that even if two companies have the same revenue, their gross margins can differ depending on how much they spend to deliver the service.

How Gross Margin Connects to Profitability?

Gross margin is one of the most critical indicators of a company’s core profitability. It shows how much money a company retains after subtracting the direct costs of producing or delivering its products and services. In simple terms, it answers this question: "How much of every ₹100 earned is left after covering the cost of goods or services?"

In fintech, where digital infrastructure dominates, gross margin becomes especially meaningful. Fintech companies often operate with relatively low variable costs, especially if they provide software, payment processing, or lending platforms. Therefore, a higher gross margin often reflects strong operational efficiency and product-market fit.

Formula Recap:
Gross Margin (%) = (Revenue – Cost of Goods Sold) / Revenue × 100

Let’s take an example:

Case Study of Razorpay:
Razorpay, a leading Indian payment gateway, scaled rapidly between 2020–2022. Its revenue rose, but more importantly, its gross margin stayed above 70%. That margin indicated that Razorpay’s payment processing services were running with highly efficient infrastructure and minimal variable costs. This strong margin allowed the company to reinvest more into growth and product development.

Why a Higher Gross Margin Means Stronger Profits

Gross margin is not the final profit figure, but it builds the foundation for net profit. A higher gross margin gives a business more room to cover other expenses, like sales, marketing, R&D, and operations, while still generating profits.

In fintech, a high gross margin means the platform or service is scalable and not weighed down by the cost of servicing each user. This is often the difference between companies that burn cash and those that build sustainable businesses.

Case Study of Zerodha:

Zerodha, India’s largest stockbroker by active clients, maintains exceptionally high gross margins. Why? Because its brokerage business runs on a flat-fee model with almost no marginal cost per trade. With automation and digital support systems, Zerodha’s gross margin exceeds 85%, allowing it to be profitable without ever raising outside capital.

Gross Margin and Scalability in Fintech

Scalability is the ability to grow without proportionally increasing costs. Fintech companies aim to scale fast, and gross margin is one of the clearest indicators of whether that growth will translate into profit.

A scalable fintech product has high gross margins and low marginal costs.

Example of UPI and Fintech Apps:

UPI-based payment apps like PhonePe and Google Pay operate in a low-margin space when it comes to direct revenues, but the businesses built on top, such as lending, wealth management, or BNPL (Buy Now Pay Later), show much higher gross margins. That’s why many fintechs start with user acquisition at low margins and then layer high-margin services later.

Case Study of Groww:

Groww, a mutual fund and stock investing app, scaled rapidly during the pandemic. Initially, the platform offered zero-cost mutual fund transactions. But once the user base grew, Groww launched premium offerings such as stock brokerage and ETFs with higher margins. 

Its core operations had low marginal costs, allowing for high gross margins at scale. The transition from free to paid services showed how scalability and gross margin go hand in hand.

Gross Margin as an Early Warning Signal

A declining gross margin can act as a red flag, even if revenue is growing. It may signal:
 

• Rising input costs (e.g. higher server costs or compliance overhead)
   
• Falling prices (due to competitive pressure)
   
• Operational inefficiencies
   
• Poor customer onboarding or retention
   

In fintech, where growth is often prioritised over profits, gross margin erosion can be an early indicator of unsustainable economics.

Case Study of Paytm:

When Paytm expanded aggressively into multiple verticals, wallets, banking, insurance, lending, it saw sharp gross margin volatility. While the payments business had thin margins, the lending and wealth segments were meant to offset that. 

However, regulatory pressure, customer churn, and rising marketing costs began to eat into gross margin. This warned investors that despite high top-line growth, the business model needed rebalancing.

Example of BNPL Firms:

Globally, Buy Now Pay Later players like Klarna and Afterpay faced gross margin 
compression due to rising default rates, higher interest costs, and merchant commission cuts. Falling gross margins were a leading indicator that their explosive growth was not backed by sustainable profitability.

Why Gross Margin Matters in the Fintech Industry

In the fintech industry, gross margin is one of the most important measures of financial health. It tells companies how much money is left from their earnings to invest in growth, technology, and customer support after covering the cost of providing their services.

Digital payment companies, online lenders, and banking-as-a-service providers all use gross margin to track how efficiently they are operating. When gross margins fall, fintech firms may review pricing strategies, negotiate with technology vendors, or streamline their operations to bring costs down.

Here are the Benefits of Tracking Gross Margin in Fintech:
 

• It helps in setting the right pricing for services.

• It shows how well costs are being controlled.

• It allows for fair comparison between different companies.

• It gives investors a quick view of profitability potential.

• It helps in planning future investments and expansions.
 

These will help you understand the gross margin better.

Gross Margin vs Net Profit Margin

Gross margin and net profit margin are both measures of profitability, but they tell different stories about a company’s financial health.

Gross margin looks only at the relationship between revenue and the direct costs of delivering products or services. Net profit margin, on the other hand, takes all expenses into account, including rent, salaries, marketing, and taxes.

Let us return to the example of Ravi Sharma’s fintech company. Earlier, his firm had a gross margin of 50%, meaning it kept ₹0.50 from every rupee earned after paying for its direct costs. But if we now include his office rent, staff salaries, software subscriptions, and taxes, the amount left will be smaller. This reduced figure is the net profit margin.

Key Differences Between Gross Margin and Net Profit Margin

This table shows how gross margin and net profit margin differ when extra expenses are taken into account: 
 

This shows that while gross margin gives a quick view of operational efficiency, net profit margin gives a complete picture after all costs.

Gross Margin vs Gross Profit

Gross margin and gross profit are often confused, but they are not the same. Gross profit is the actual money left after paying for direct costs. Gross margin is the same figure shown as a percentage of total revenue.

Take Meera PayTech as an example. If her fintech business earns ₹3,50,000 in revenue and spends ₹1,75,000 on direct costs, the gross profit is ₹1,75,000. When we divide this by her revenue and multiply by 100, we get a gross margin of 50%.

Gross profit tells you the size of the profit in rupees, while gross margin shows how efficiently the company turns revenue into profit. Both are important for business decision-making.

Gross Margin and Gross Profit Comparison With Example Figures

This table compares gross profit in rupees with gross margin as a percentage for different fintech companies: 
 

Here we can see that even when two companies have the same gross margin, the gross profit amount can be very different.

What Is a Good Gross Margin?

A good gross margin depends on the type of industry. In fintech, the margins are often higher than in manufacturing because there are fewer physical production costs.

For example, digital payment companies often report gross margins above 60%, while online lending platforms may see margins between 40% and 55% depending on their cost structures.

For a small fintech startup, maintaining a gross margin above 50% is generally considered healthy, as it leaves enough room for marketing, research, and scaling operations.

Here are Fintech Sector Gross Margin Averages: 

• Digital payments: about 60% to 65%

• Online lending: about 40% to 55%

• Wealth tech: about 50% to 60%

• Banking-as-a-service:  about 45% to 55%

How to Improve Gross Margin in a Fintech Business?

For fintech companies, gross margin can improve through smart cost management and revenue growth strategies. It is not just about earning more but also about spending wisely on operations.

Let us take the example of Arjun Loans Pvt. Last year, his company had a revenue of ₹5,00,000 and a COGS of ₹3,00,000, giving him a gross margin of 40%. By negotiating better software licence rates and automating part of his loan processing, he brought down COGS to ₹2,50,000. This increased his gross margin to 50% without raising prices.
 

Ways to Improve Gross Margin in Fintech

• Use automation tools to reduce manual work.

• Negotiate better rates with cloud and tech providers.

• Offer premium services at higher prices.

• Improve fraud detection to cut loss-related costs.

• Monitor and review supplier contracts regularly.

• Train staff to work more efficiently.

• Use data analytics to spot low-profit products and adjust pricing.
 

Improving gross margin often comes from a mix of cost-saving and increasing customer value.

Conclusion

Gross margin is one of the most important numbers for any fintech company. It shows how well a business is turning revenue into profit after paying for direct costs. While gross profit tells you the amount in rupees, gross margin shows efficiency as a percentage.

High gross margins allow fintech companies to invest in growth, marketing, and better technology, while low margins may signal the need to control costs or change pricing strategies. Whether you run a small payment startup or a large online lending platform, tracking and improving gross margin can make the difference between slow growth and long-term success.

FAQs on Gross Margin in Fintech

1. What is the main use of gross margin?
It helps a company understand how much money is left from revenue after paying for direct costs and shows efficiency in core operations.

2. How is gross margin different from net profit margin?
Gross margin only looks at revenue and direct costs, while net profit margin includes all expenses like rent, salaries, and taxes.

3. What is a healthy gross margin for a fintech company?
Many fintech companies aim for margins above 50%, but this can vary depending on the type of service they offer.

4. Can gross margin be negative?
Yes, if the cost of providing a product or service is higher than the revenue earned, the gross margin will be negative.

5. How often should fintech companies check their gross margin?
It is best to review it at least every quarter to track trends and take early action if margins are falling.

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LoansJagat Team

‘Simplify Finance for Everyone.’ This is the common goal of our team, as we try to explain any topic with relatable examples. From personal to business finance, managing EMIs to becoming debt-free, we do extensive research on each and every parameter, so you don’t have to. Scroll up and have a look at what 15+ years of experience in the BFSI sector looks like.