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Companies use gross margin to measure how their production costs relate to their revenues. For example, if a company's gross margin is falling, it may strive to slash labor costs or source cheaper suppliers of materials. Alternatively, it may decide to increase prices, as a revenue increasing measure.
Managing gross margin helps a firm avoid problems with prices that are too low and direct costs that are too high, and hence problems with breakeven and profit. When a firm is generating adequate sales but gross margins are low, it signals an issue in one or both of these areas.
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