Gross profit is revenue minus the cost of goods sold (COGS). It represents the money remaining after covering the direct costs of producing or sourcing products.
Why Gross Profit matters
Gross profit measures the profitability of your products before accounting for other expenses like marketing or operations. A strong gross profit margin allows more budget for acquisition, retention, and growth activities. Low gross profit margins may require higher volumes to sustain profitability.
How Gross Profit works
Gross Profit = Revenue − COGS. Track this by product, category, or channel to identify where your business is most profitable. COGS includes all costs directly related to the products sold, such as manufacturing, wholesale prices, and shipping to your warehouse.
Example in ecommerce
A home décor store earns $500,000 in revenue with $300,000 in COGS, leaving $200,000 gross profit. By negotiating better supplier terms, COGS drops to $280,000, improving gross profit margin by 4%.
Common mix-ups
Gross profit is not the same as net profit, which subtracts all operating expenses. It’s also different from gross margin, which expresses gross profit as a percentage of revenue.
Best practices
- Focus marketing spend on high-margin products.
- Negotiate supplier costs to improve margins.
- Reduce waste in production and shipping.
- Analyze gross profit by category to adjust product mix.
- Track gross profit alongside sales volume for balanced growth.
- Use gross profit margins to set discount limits.
- Monitor margins during promotions to avoid eroding profitability.
Industry benchmarks
- Many ecommerce brands aim for 40-60% gross margin, depending on category.
- Luxury goods often exceed 70%, while low-margin commodities may be under 30%.
