Profit & margins
Operating profit formula and operating margin
The operating profit formula is gross profit minus operating expenses. Operating margin is operating profit as a percentage of revenue. For an online store, operating expenses are everything it costs to run the business except the products themselves: ads, shipping, payment fees, apps, staff and rent.
The operating profit formula
Operating profit = Gross profit − Operating expenses Operating margin % = Operating profit ÷ Revenue × 100
- Gross profit
- revenue − cost of goods sold
- Operating expenses
- all costs of running the business except COGS, interest and taxes
Operating profit is also called operating income. It sits between gross profit and net profit on a P&L.
What counts as operating expenses for an online store
| Type | Examples |
|---|---|
| Marketing | Google, Meta and other ad spend; influencer and affiliate fees |
| Fulfillment | Outbound shipping, packaging, 3PL pick-and-pack fees |
| Transaction costs | Payment processing and marketplace fees |
| Software | Shopify plan, apps, email platform, design tools |
| People | Salaries, contractors, freelancers |
| Premises and admin | Rent, utilities, insurance, accounting, legal |
What's not an operating expense:
- COGS: the landed cost of products sold (already subtracted in gross profit).
- Interest on loans.
- Income taxes.
Worked example
Worked example: one month for a Shopify storeExample numbers
| Line | Amount |
|---|---|
| Net revenue | $47,000 |
| COGS | −$19,000 |
| Gross profit | $28,000 |
| Ad spend | −$8,000 |
| Shipping and fulfillment | −$4,200 |
| Payment fees | −$1,400 |
| Apps and software | −$600 |
| Salaries and contractors | −$6,000 |
| Other overheads | −$1,200 |
| Operating profit | $6,600 |
Operating margin = $6,600 ÷ $47,000 = 14.0%
The calculator above gives profit before tax and interest, which is effectively operating profit for most small stores.
Why operating margin is the clearest view of your store
Operating margin shows how well the store itself runs, separate from how it's financed or taxed:
- It includes every cost of selling. Gross margin ignores ads and shipping, which for many online stores are the biggest costs after the products.
- It excludes financing. Two stores with the same operations but different loans will have different net profits, but the same operating profit.
- It shows what's left to grow with. Operating profit is what funds new stock, new products and the owner's return.
How to improve operating margin
- Cut ad spend that doesn't break even. The Ad Profit Leak Score shows whether your ads cover their cost after margin.
- Lower shipping per order with better carrier rates, lighter packaging or a free shipping threshold that raises order value.
- Audit apps and subscriptions. Small monthly fees add up.
- Raise average order value, so fixed costs are spread over bigger orders.
- Keep overheads growing slower than revenue. See the guide to overhead costs.
For how operating profit differs from net income, see operating profit vs net income.
FAQ
Is operating profit the same as EBIT?
Often, yes. Operating profit and EBIT (earnings before interest and taxes) are usually the same or very close. They can differ if the business has non-operating income or one-off items, which are counted in EBIT but not in operating profit.
Is operating income the same as operating profit?
Yes. Operating income and operating profit are two names for the same figure: gross profit minus operating expenses.
Are ad costs operating expenses?
Yes. Ad spend, along with shipping, payment fees, apps, staff and rent, is an operating expense. Only the cost of the products themselves goes into COGS.
What's a good operating margin?
It varies by business model and size. Track yours over time and compare it with your target: it needs to cover interest and tax and still leave the net profit you want.