Revenue minus the cost of goods sold (COGS). Measures how efficiently a business produces or sources its products before accounting for overhead, taxes, and other operating expenses.
Understanding Gross Profit
Gross profit is calculated by subtracting the cost of goods sold (COGS) from total revenue. It represents the money left over after covering the direct costs of producing or purchasing the products you sell, before deducting operating expenses like rent, marketing, and administrative costs.
Gross profit margin — expressed as a percentage (Gross Profit ÷ Revenue × 100) — is one of the most important metrics for product-based businesses. It tells you how efficiently you source or manufacture products relative to your selling price.
For ecommerce businesses, gross profit can be calculated at the individual product level (per-SKU), by sales channel, or for the business as a whole. Tracking gross profit at multiple levels helps identify which products and channels are most profitable.
Why It Matters for Ecommerce
Gross profit determines whether your ecommerce business has a viable product economics. If your gross margin is too thin, even high sales volume won't generate enough money to cover operating expenses. Monitoring gross profit by SKU and channel helps you make pricing, sourcing, and product-mix decisions that improve overall profitability.
Practical Example
Product A sells for $40 with a COGS of $12 (70% gross margin). Product B sells for $40 with a COGS of $30 (25% gross margin). Even though both generate the same revenue, Product A leaves $28 per unit to cover fees and overhead, while Product B leaves only $10. Focusing on Product A would be far more profitable.
Related Terms
Cost of Goods Sold (COGS)
The direct costs attributable to producing or purchasing the goods a business sells, including materials, labor, and shipping. Subtracted from revenue to calculate gross profit.
AccountingNet Income
Total revenue minus all expenses, taxes, and costs — the "bottom line" of the income statement. Represents the actual profit a business earns after all deductions.
AccountingIncome Statement
A financial statement showing revenue, expenses, and profit or loss over a specific period. Also called a profit and loss statement (P&L), it measures a company's financial performance.
Put This Knowledge Into Practice
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