Gross margin is what is left from each unit of sales after paying the direct cost of making the product or service, called cost of goods sold, or COGS. A high, steady gross margin means the company can charge well above what it costs to produce, a clear sign of pricing power.
Buffett and Clark use a rough rule for a business with a strong moat: a gross margin that consistently stays above 40%. Below that, a business tends to compete mainly on price, and rivals slowly grind the margin down.
Watch the trend more than the exact number. A margin that erodes year after year means competitors are catching up, even if today's level still looks healthy.