Profit & margins
Gross profit vs net profit
Gross profit is revenue minus the cost of the goods you sold. Net profit is what's left after every cost: product costs, operating expenses, interest and taxes. Gross profit shows whether your products make money; net profit shows whether your business does.
Gross profit vs net profit: the formulas side by side
Gross profit = Revenue − COGS Net profit = Revenue − COGS − Operating expenses − Interest − Taxes
- Revenue
- net revenue, after discounts and returns
- COGS
- cost of goods sold: the landed cost of the products you sold
- Operating expenses
- ads, shipping, payment fees, apps, staff, rent and other running costs
Both are often shown as a percentage of revenue:
Gross margin % = (Revenue − COGS) ÷ Revenue × 100 Net margin % = Net profit ÷ Revenue × 100
| Gross profit | Net profit | |
|---|---|---|
| Subtracts | COGS only | COGS, operating expenses, interest, taxes |
| Answers | Do my products make money? | Does my business make money? |
| Affected by | Pricing, supplier costs, discounts | Everything, including ads, staff and financing |
| Typical size | Much larger | Much smaller |
Waterfall: from revenue to net profit
Here's one month for an example Shopify store, step by step:
Worked example: the profit waterfallExample numbers
| Step | Amount | % of net revenue |
|---|---|---|
| Net revenue | $47,000 | 100% |
| − Cost of goods sold | −$19,000 | 40.4% |
| = Gross profit | $28,000 | 59.6% |
| − Ad spend | −$8,000 | 17.0% |
| − Shipping and fulfillment | −$4,200 | 8.9% |
| − Payment processing fees | −$1,400 | 3.0% |
| − Apps and software | −$600 | 1.3% |
| − Salaries and contractors | −$6,000 | 12.8% |
| − Other overheads | −$1,200 | 2.6% |
| = Operating profit | $6,600 | 14.0% |
| − Interest | −$200 | 0.4% |
| − Taxes | −$1,300 | 2.8% |
| = Net profit | $5,100 | 10.9% |
The gap between a 59.6% gross margin and a 10.9% net margin is where most online stores win or lose. In this example, ads and shipping alone take nearly 26 points.
Shopify Profit Margin CalculatorYour real net margin after COGS, shipping, fees, and ad spend.The calculator above subtracts COGS, shipping, payment fees, ad spend and other costs, but not interest or taxes, so it gives profit before tax and interest, close to operating profit.
What moves each number
Gross profit changes with:
- your prices and discounts
- supplier prices, freight and duties (landed cost)
- your product mix: selling more high-margin products raises it
Net profit changes with all of that, plus:
- ad spend and how efficiently it converts
- shipping, packaging and fulfillment costs
- fixed costs: apps, staff, rent
- interest on loans and your tax position
Which one to watch, and when
- Weekly: gross margin by product, because pricing and cost problems show up here first.
- Monthly: operating profit and net profit, once all costs are in.
- When planning ad budgets: gross margin, which sets your break-even ROAS.
For the formulas in detail, see the guides to the net profit formula, the operating profit formula and gross profit margin.
FAQ
What's the main difference between gross profit and net profit?
Gross profit only subtracts the cost of the goods you sold. Net profit subtracts everything: product costs, operating expenses such as ads, shipping and staff, plus interest and taxes.
Can gross profit be positive while net profit is negative?
Yes. That's common in online stores that spend heavily on ads or carry high fixed costs. Products sell for more than they cost, but operating expenses use up all of the gross profit and more.
Is net profit the same as net income?
Yes. Net profit, net income and the bottom line all mean the same thing: what's left after every expense, interest and tax.
Which one should I track?
Both. Gross profit shows whether your products and pricing work. Net profit shows whether the whole business works. Operating profit, in between, shows how the store performs before financing and tax.