TVP – Metric 17 Gross Margin
- Resource Type
- Tool
- Authors
- Alan Fusfeld, Innovation Research Interchange
- Topics
- Innovation Metrics, Stage-Gate, Tools and Techniques
- Associated Event
- Publication
Background | User Guide | Program Contents | Stakeholders | List of Metrics
1. Metric Definition
Gross profit as a percentage of sales, where gross profit equals net sales minus cost of goods sold (product costs plus direct manufacturing costs).
2. Advantages and Limitations
To some extent gross profit margin reflects the value of the firm’s technology assets and the value created by R&D. However, raw material, production, and distribution costs also directly affect the firm’s gross profit margin. Each firm should attempt to understand the correlation of gross profit margin to R&D effectiveness. The value of this metric will depend almost entirely on the quality of the measurement of R&D input and impact as shown in R&D Yield and R&D Return metrics.
3. How to Use the Metric
Value assessment should be based on change in gross profit margin from period to period. (Periods should be appropriate to an industry and may be in excess of one year.) Changes in gross profit margin in relationship to changes in values of other metrics (e.g., financial return, technology transferred to manufacturing, sales protected by proprietary position) should be followed in an attempt to track the contribution of R&D. This is a retrospective metric that can be used as a benchmark with the competition, if gross margin data from competitive firms are available.