Gross profit is the first number to check when you want to know whether a store earns money. It shows how much is left from each sale after paying for the product itself and for whatever is tied directly to the sale. A store that works it out from the supplier's price alone sees a profit higher than the real one, and prices accordingly. Below: what gross profit is, the formula, what goes into it, a worked example and the common mistakes. The natural next step is operating profit, which takes the running costs of the business off gross profit.
What is gross profit
Gross profit is net revenue minus the cost of goods sold. It excludes expenses such as marketing, rent, software and salaries.
- What it tests: whether the pricing and the product costs are right.
- What it does not test: whether the whole business earns money. Operating profit does that.
The formula
Gross profit = net revenue − cost of sales
Gross margin = gross profit ÷ net revenue
Net revenue is sales without VAT. The cost of sales is the cost of the products sold and, in an online store, the costs tied directly to the sale, such as shipping and payment fees.
Example: one month in a store
- Net revenue: 100,000.
- Product cost: 42,000.
- Shipping: 6,000.
- Payment fees: 2,500.
- Cost of sales: 50,500.
- Gross profit: 49,500.
- Gross margin: 49.5%.
The figures in this article's examples are illustrative only and do not reflect actual customer data.
Gross profit in an online store
Gross profit shapes several everyday decisions:
- Pricing: a price that leaves too thin a margin does not cover the rest of the business.
- Discounts and coupons: every discount comes straight off gross profit.
- Free shipping: a threshold set too low loses money on small orders.
- Advertising budget: gross profit sets how much you can pay to win a customer.
Common mistakes
- Supplier price only. Without freight and duty, an imported product looks more profitable than it is.
- Sales including VAT. The VAT is not income, so it inflates profit.
- A product with no cost. A product created with no cost looks like a hundred percent profit.
- A cost that is not updated. A supplier price rise changes your profit even if the price on the site did not change.
Related measures
- Cost of goods sold: the direct cost of the products sold.
- Operating profit: gross profit minus operating expenses.
- Net profit: what remains after interest and taxes.
- Profit and loss statement: the report that shows all of these steps together. See our profit and loss statement guide.
Gross profit in StoreChart
- Per order: profitability calculation shows revenue before VAT, product cost, shipping and payment fee, profit and profit percentage.
- Per period: the profits screen totals gross profit for a date range and breaks it down by category.
- Missing cost: the screen shows how many orders lack a product cost, because they look more profitable than they are.
Frequently asked questions
What is the difference between gross profit and gross margin?
Gross profit is an amount, for example 49,500. Gross margin is a percentage: gross profit divided by net revenue. The percentage lets you compare months, products and categories regardless of the size of sales.
Is VAT included in gross profit?
No. You start from net revenue, without VAT, because the tax is passed on to the tax authority and is not the business's income. A calculation that starts from sales including VAT inflates profit.
What is the difference between gross profit and operating profit?
Operating profit is gross profit after operating expenses such as marketing, rent and software are taken off. Gross profit tests the products and the sales, and operating profit tests the whole business.