Gross Profit: What It Is & How to Calculate
Table of Contents
Gross profit is the amount of profit remaining from total sales after subtracting the direct costs of producing or purchasing the goods it sold.
These direct costs are known as the cost of goods sold (COGS) and typically include expenses such as materials and direct labor used in production. It does not include operating expenses like rent, utilities, marketing, or administrative costs.
The formula for calculating gross profit is:
In this guide, you’ll learn what gross profit is and how to calculate it. We’ll also provide you with simple examples to make it clear.
What is Gross Profit?
Gross profit is the revenue that remains after subtracting the direct costs of purchasing or producing the products sold (Cost of goods sold).
Cost of Goods Sold typically includes:
- Product purchase cost or manufacturing expenses
- Shipping costs from suppliers to your warehouse
- Import duties and customs fees
- Packaging materials for customer orders
- Payment processing fees
- Direct labor costs for product preparation
Gross profit reflects the profitability of your products and sales before accounting for operating expenses.
Stores use it as an early indicator for their product profitability. Without it, you can’t see if your products are truly profitable. Tracking it shows whether your pricing and sourcing decisions are boosting your bottom line.
Further Reading
How to Calculate Gross Profit for eCommerce Stores?
Gross profit is calculated using this formula:
Let’s say your store made $20,000 in sales this month. Your COGS included:
- Product costs: $9,000
- Shipping from suppliers: $1,000
- Packaging: $500
- Payment processing fees: $300
Your total COGS = $9,000 + $1,000 + $500 + $300 = $10,800.
Using the formula: Gross Profit = $20,000 – $10,800 = $9,200
So in this example, your gross profit of $9,200 shows the amount your store retains from sales after paying for product and shipping costs. It helps you see if your pricing strategy and products are generating profit before you factor in other business expenses.
Further Reading
What is a Good Gross Profit Margin?
A good gross profit margin varies significantly by product niche and business model. That’s why high-profit-margin businesses can have different profit margins, but they all land in a healthy range.
- Excellent (50%+): Digital products, software, high-end specialized items
- Good (30-50%): Branded products, niche markets, premium positioning
- Average (20-30%): General retail, competitive markets, commodity products
- Challenging (Under 20%): Highly competitive markets, low-margin products
As Harry Chu - Founder of TrueProfit notes, "A newer eCommerce business might accept lower margins initially to attract customers, while established businesses should focus on optimizing margins for long-term profitability."
Further Reading
How to Find Gross Profit on PnL Report?
In your Profit and Loss report, gross profit appears as the first major profitability indicator. Here's how it typically looks:
8 Best Practices to Improve Gross Profit
8 smart, multi-step approaches to improve your gross profit in 2025:
1. Start by focusing on your product mix.
Track which products bring the highest margins and push those harder.
At the same time, review low-margin products that don’t move enough volume—consider adjusting their price or removing them.
Further Reading
2. Leverage your growth to negotiate better supplier terms.
Use your buying power to secure lower costs, better payment conditions, and reduced shipping fees.
Working with multiple suppliers keeps pricing competitive and your margins healthy.
3. Adjust pricing based on order history data.
Use data-backed methods like dynamic pricing, competitor analysis, and value-based pricing.
Test price increases carefully on high-demand products where competition is low to protect sales volume while boosting margins.
4. Cut rate of return even before checkout.
Cut rate of return by improving product descriptions, offering accurate size guides, and using high-quality images.
Collect and highlight customer reviews to build trust, and keep strict quality control to avoid defective products.
5. Prove you worth cheaper COGS
Negotiate carrier rates, optimize packaging to avoid dimensional weight fees, and consider multiple fulfillment centers to cut shipping rates.
Further Reading
6. Product bundling helps too.
Bundles increase average order value and can boost overall margins while helping clear slower-moving stock.
7. Focus on retention.
Repeat customers usually buy higher-margin products and cost less to acquire.
That means better gross profit over time.
8. Monitor these efforts with detailed metrics.
When you connect the dots between pricing, product mix, returns, and shipping, you gain the insights needed to steadily grow your gross profit and build a sustainable business.
Understanding gross profit is essential for making smart business decisions—but tracking it manually can be a hassle. That’s where TrueProfit comes in.
It automatically pulls in your costs, including COGS, ad spend, shipping, and more, giving you real-time insight into your actual profit. No spreadsheets, no guesswork. Just clear, accurate data whenever you need it.
Whether you’re scaling or just starting out, knowing your true numbers is key. TrueProfit helps you stay on top of your margins so you can grow confidently. Start tracking your gross profit the easy way—with TrueProfit.
Gross Profit FAQs
What is meant by gross profit?
Gross profit is the money left over after subtracting the cost of goods sold (COGS) from your total revenue. It shows how much profit you make directly from selling products before accounting for operating expenses.
How to compute gross profit?
You compute gross profit by subtracting the cost of goods sold (COGS) from your total revenue.
What is GP profit?
GP profit stands for gross profit, which is the money left after you subtract the direct costs of producing or purchasing the products you sell.
How to find gross profit on income statement?
To find gross profit on an income statement, look for the line that shows total revenue, then subtract the cost of goods sold listed just below it.
What is retail gross profit calculation?
Retail gross profit calculation means subtracting the cost of the products you sold from the total sales revenue in your retail store to see how much you made before operating expenses.
What's net profit vs gross profit?
Gross profit is revenue minus cost of goods sold, while net profit is gross profit minus all operating expenses (rent, salaries, marketing, etc.). Net profit is your final profit after all costs.
How do I calculate gross profit?
Use this formula: Gross Profit = Total Revenue - Cost of Goods Sold (COGS). For example, if you earn $100,000 in sales and your products cost $60,000, your gross profit is $40,000.
What does 20% gross profit mean?
A 20% gross profit margin means you keep $0.20 for every $1.00 in sales after covering product costs. Calculate it as: (Gross Profit ÷ Revenue) × 100 = 20%.
What is your gross profit?
We can't calculate your specific gross profit, but you can find it using: Your Revenue - Your Cost of Goods Sold = Your Gross Profit. Check your sales data and product costs to calculate it.
What's the difference between gross and net?
Gross refers to total amounts before deductions, while net refers to amounts after deductions. Gross profit excludes operating expenses; net profit includes all business expenses.
What does gross profit not include?
Gross profit excludes operating expenses like rent, salaries, marketing costs, administrative expenses, taxes, and interest payments. It only accounts for direct product costs.
How to calculate gross income?
Gross income is your total revenue before any deductions. Simply add up all sales, income, and revenue streams. For businesses, this is your total sales before subtracting any costs.
Is net profit good or bad?
Net profit is good—it's your actual profit after all expenses. Positive net profit means your business is profitable, while negative net profit (net loss) means you're spending more than you earn.
Does gross profit include other income?
No, gross profit only includes revenue from core business operations minus cost of goods sold. Other income like interest, investments, or non-operating revenue is typically added separately in financial statements.
Leah Tran is a Content Specialist at TrueProfit, where she crafts SEO-driven and data-backed content to help eCommerce merchants understand their true profitability. With a strong background in content writing, research, and editorial content, she focuses on making complex financial and business concepts clear, engaging, and actionable for Shopify merchants.
Related readings:
