Have you ever walked into a situation confident only to realize you had no idea what you were doing?

Early in my career, I jumped between a few engineering jobs and realized that I didn’t just want to write code, I wanted to be an entrepreneur.

So I got an MBA, thinking that would teach me everything about starting and running a business. Post-MBA, after a brief stint founding a dot-com startup (yep, I was one of the dot-bombs!), I somehow landed a Product Manager job. (I was one of those “accidental PMs.”)

The tech scene wasn’t quite as big in the Philadelphia-DC region at that time. So I ended up working at a mid-tier services company in the consumer space that served big box retailers.

I was genuinely excited. Product Management was new to this company (and still generally new to this geographic region). There was an energy behind going into a situation and being “the man.” Sure, I didn’t have the first clue about the retail business or the services business. Or even product management, for that matter. But I was confident I could figure it out. I was the man.

It didn’t take long to regret the desire to be the man. In one of my first meetings with the GM of our business unit, we were going over my product plans. I’d spent hours upon hours preparing it.

After patiently listening to my presentation, he asked a simple question:

“How does this get us to our gross margin target?”

I froze.

In hindsight, I should have been prepared for that. But, yeah, I absolutely wasn’t.

I stammered. Then froze again. As I restarted, I managed to stutter, “Well.. we could increase prices or decrease labor.”

I asked for some time to look into it and come back with a more concrete answer and he was gracious enough to grant it.

I don’t know if he regretted his decision to hire me in that moment, but I sure did.

I went away, came up with some more ideas, and we made a plan.

Over the next few months, we saw gross margins of the product improve.

That’s when I realized: The ability to manipulate the numbers based on your direct action is a superpower and I felt like Superman.

Over the years in that position, that feeling never went away. As I’ve journeyed in my career through various product roles and my own businesses, I still feel that feeling.

I talk a lot about revenue in this newsletter. And it’s important. Growth is the fuel that propels your product’s engine in the marketplace.

But there’s another key metric that you influence as a product manager: Gross Margin.

Most product people I meet don’t really understand what this is, why it’s important to understand, and how you as a product leader can impact it.

So, today we’re going to dive deep into it and talk about the 4 drivers of it.

Gross Margin is the percentage of revenue left after direct costs are accounted for. Direct costs are typically called cost of sales or cost of goods (COGS).

Gross Profit is the amount of revenue left after direct costs — that is, COGS).

Gross Margin is calculated by dividing Gross Profit by Revenue.

In software, COGS or Cost of Sales (CoS) represents the direct, variable costs required to host, deliver, and support your software for paying customers. Things like:

Things like R&D (your salary as a PM, your engineers’ salaries), sales and marketing (customer acquisition costs, sales commissions, marketing spend), and general overhead (rent, legal fees, non-product software tools) are not included in COGS.

So, why does Gross Margin matter?

Well, let’s say you improve gross margin by 2.25% (right column). If General & Administrative costs remain the same, you’ve increased profit by 11.3%.

To get that same impact without a change to Gross Profit, you’d need to decrease General and Administrative expenses by $22,500, or 6.43%. (For example, laying off people.)

The difference is that cutting $22,500 from an “overhead” is a one time cut, while changes to Gross Margin give you benefits today and into the future.

Let’s look at the other side of the equation: a 5% increase in COGS would decrease profit by almost 10%.

This makes Gross Margin extremely powerful and important to control. This is why investors, boards, and CFOs hyper-focused on this number. If you’ve ever done a pricing exercise, you know this was the number that was going to be scrutinized in your profitability or ROI analysis.

So, how can you as a product team impact it? There are 4 main drivers of gross margin.

Price is one of the easiest levers to use to impact Gross Margin.

Many first-time founders and product leaders are reluctant to raise prices because they fear they’ll lose customers. But big businesses raise prices all the time.

I’m not saying you should gouge your customers. I’m merely saying this is a strategic lever you should not ignore. Smart implementation can help keep customers happy while also making your product more profitable.

Prices should be raised in two scenarios:

When a customer has the same price for 5 years, a change feels substantial. Instead, small, regular increases helps prime your customers in a way that won’t shock the system.

There are different strategies to deploy here.

Which approach you take is dependent on the relationship you have with your customers. If you’re a high-touch service, annual increases may not ideal.

Like a landlord with a full rental, increasing prices could draw attention to a service they would have otherwise continued without question.

Cost associated with revenue is tricky because if you could reduce costs you would have done it, right?

In other words, you could “ask for a lower price” from your suppliers, but there’s a floor to that. So, let’s look at other options.

The first two are self-explanatory, so let’s focus on the third.

Non-value-producing costs are those that are a part of delivering your product but don’t add value to the service. Common ones are:

These can increase drastically without you realizing it. There’s no magic bullet to address these, but they’re important to be aware of. Shop lower cost providers, work on the delivery of products to reduce returns/refunds, and increase prices as these cost structures change.

I’ve seen multiple businesses who were resistant to raising prices because “the cost of the product hasn’t gone up,” but they failed to account for shipping or storing cost or processing fees, which had increased. By missing those, they were accepting less margin without realizing it.

Many businesses have more than one product and/or service.

When looking at the revenue, I typically split it into two categories:

These categories can be fluid and can change, but which category an item falls will have an important impact on your pricing strategy.

The core product or service will be the main driver of margins, but strategically increasing margins on secondary products or services can have an outsized impact. These are also known as value-added products or services. They can really pack a punch.

Every year Apple releases a new iPhone. And each time you buy a new phone, you end up needing or wanting other products — phone case, headphones, charging cables, etc.

While the phone will drive most of the revenue, if half the buyers buy some sort of accessory, you can drive your overall Gross Margin up by 1.53% and Gross Profit up almost 10%. (Which is why Apple charges insane prices for their accessories.)

Would you want a 10% higher Gross Profit?

Knowing what product or service drives your Gross Margin and how to manipulate the mix is what can separate those scraping by from those thriving.

One way to do this is by offering a premium offering, one that has a higher perceived value but also higher margins.

The right customer will see a ton of value in that premium offering, but it also impacts the way potential customers react to your primary offer pricing.

We hit all the obvious items above, so what are some less obvious items?

A few examples:

There are almost endless ways you can improve your operational efficiency and it will often be specific to your business.

The key here is realizing this isn’t a one-time thing, it’s an approach. It’s constantly looking for ways to improve, testing, and implement. Especially as a product’s business reaches scale, eeking out even a quarter percentage here or there can create a long-term impact on the business.

Gross Margin is one of the most important strategy levers in a product leader’s toolkit.

This isn’t one change and done. This is a process you’re never “done” with, as market conditions are always changing.

At least once or twice a year you should put aside some time to get into the weeds of what’s driving your margins and how you can improve them.

If you’ve had success improving your margins, I’d love to hear from you. I’d like to start sharing some real-life case studies and can anonymize data if you’d like. Just reply here to get the conversation started.

And if I can help you, feel free to grab time.

I still remember sitting across from my GM after he asked me that question about gross margin.

It was uncomfortable. But looking back, I’m grateful he asked it. That conversation completely changed how I thought about product management.

More importantly, it changes how executives see you.

The product leaders who earn trust aren’t just good at product craft. They understand how the business makes money, how capital creates growth, and how product decisions improve financial outcomes.

Gross margin is just one piece of that puzzle.

Understanding gross margin won't magically make you a stronger product leader.

But understanding why gross margin matters, and knowing how your product decisions influence it, absolutely will.

That’s business fluency.

It’s the ability to connect product strategy to revenue, margins, investment decisions, and business growth.

Today, helping product leaders develop that same business fluency has become one of my favorite parts of my work.

That’s the skill Mike Smart and I teach in the Business Fluency for Product Leaders Masterclass.

We teach the business thinking most product leaders never formally learned, but executives assume you already know.

If today’s article made you realize there are business concepts you wish you’d learned years ago, this course is that missing piece:

The next cohort begins in July and space is limited. If you’d like to build those skills, we’d love to have you join us.

That’s it for today.

Have a joyful week, and, if you can, make it joyful for someone else too.

cheers,
shardul

Shardul Mehta
I ❤️ product managers.

​Follow me on LinkedIn