Gross Margin: The Oldest Power Move in Capitalism

The Alchemy of Gross Margin

In the annals of business history, wars weren’t always fought with fire and steel. Often, they were waged in silence—on spreadsheets, in ledgers, and across supply chains. And if you wanted to know who was winning, you looked not at revenue or headcount, but at one elegant number: gross margin.

Gross margin is the difference between a company’s revenue and its cost of goods sold (COGS), expressed as a percentage of revenue. It tells you, simply and profoundly, how much money a company retains on each dollar of sales to cover everything else—marketing, innovation, executive salaries, and yes, profit.

In formula:

Gross Margin (%) = ((Revenue − COGS) / Revenue) × 100

But this is more than math. It is muscle.

From Rockefeller to Jobs: The Historical Power of Margin

In 1870, John D. Rockefeller founded Standard Oil. He wasn’t the first to refine oil—but he was the first to weaponize gross margin. By vertically integrating—owning the barrels, the trains, and the refineries—he slashed his COGS to levels competitors couldn’t match. When others sold kerosene at a 10% margin, Standard Oil operated at 30%. That gap? It let him reinvest, drop prices further, and drive rivals into oblivion.

Gross margin, to Rockefeller, was more than a number—it was a moat.

A century later, Steve Jobs and Tim Cook would use the same playbook. Apple products, produced with tight control over design and supply chain, boast margins north of 40%, even while competitors struggle to clear 15%. Their hardware wasn’t just beautiful—it was profitable at scale, a quiet testament to operations mastery.

Margin as Competitive Weapon

To understand a firm’s competitive power, gross margin is where you begin. Consider three companies:

• Company A has a 15% gross margin. It resells commodity goods—low differentiation, minimal pricing power.

• Company B operates at 45%. It’s found a way to build once and sell many times—think software.

• Company C earns 70% margins. It’s likely a platform or a monopolistic niche with massive brand loyalty.

That spread isn’t just financial. It tells a story about strategy.

• A high-margin business means you have pricing power, brand strength, or operational excellence.

• A low-margin business signals vulnerability—competition, lack of scale, or undifferentiated offerings.

And most importantly, in downturns—when revenue contracts and investors get skittish—margin is survival.

Margin in a Recession: The Tale of Costco vs. JCPenney

During the 2008 financial crisis, two retail giants faced the storm. JCPenney, a department store chain with middling margins (~35%), relied heavily on promotions. It stumbled and eventually fell into decline. Meanwhile, Costco, with razor-thin margins (under 15%), survived and thrived.

Why? Because Costco’s model was built for endurance. Its gross margin was low by design—but consistent and scalable. It derived strength from volume and customer loyalty. Where others buckled, Costco’s discipline paid off.

Gross Margin as Strategy in the AI Era

Today, companies like NVIDIA and OpenAI are playing the same long game. NVIDIA’s margins—driven by specialized chips and dominance in AI hardware—are consistently over 60%. It gives them the fuel to invest, hire top talent, and lead the arms race of computation. A startup trying to catch up? Without comparable margins, it’s a race run on fumes.

In private equity, margin signals maturity. In venture capital, it signals potential. In hedge funds, it signals alpha behind the scenes. As investor Bill Gurley once put it: “All revenue is not created equal.”

He might have said: all gross margin is not created equal.

Final Word

Gross margin is not just accounting. It is a reflection of product power, operational control, and strategic clarity. If revenue is vanity and profit is sanity, gross margin is reality. It tells you who’s building something real—and who’s just treading water.

So next time you open a financial statement, skip the headlines. Go to the income statement. Look at the gross margin. Ask: What does this company really keep from the market? And what does that say about its power?

That’s how you learn to read business like Rockefeller.

References for Deeper Learning

• Aswath Damodaran on Margins

• Apple Financial Statements

• Ben Thompson on Apple Margins

• “Margin of Safety” by Seth Klarman

• Standard Oil History

© [2025] Monoco. All rights reserved.
This article is proprietary research published by Monoco for educational and informational purposes only. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means without prior written permission from the publisher.