What Is Gross Profit? Formula vs Gross Margin

How Gross Profit Is Calculated

Gross profit = Net sales − Cost of goods sold (COGS)

Net sales is what your products brought in once discounts and returns come off. In Shopify, it doesn't include the shipping and tax you charge. COGS is what you paid your supplier for those items, or what it cost you to make them.

Only count the items you actually sold. Stock still sitting on the shelf doesn't go in.

Example: one month at a phone accessories store

To keep it simple, the store sells just two products.

Product	Sold	Net sales	COGS	Gross profit	Margin
Phone cases ($25, cost $5)	150	$3,750	$750	$3,000	80%
Earbuds ($120, cost $72)	90	$10,800	$6,480	$4,320	40%
Total	240	$14,550	$7,230	$7,320	about 50%

A case leaves you $20 ($25 − $5), while a pair of earbuds leaves $48 ($120 − $72). So the cases have double the margin, but the earbuds bring in $1,320 more gross profit.

What Gross Profit Has to Pay For

You don't get to keep your gross profit. Running the store gets paid out of it first: ads, shipping labels, payment fees, apps and wages.

Say the accessories store spends $7,800 on all of that in the same month. Its $7,320 of gross profit comes up $480 short, and the month ends in a loss.

Gross margin is the same number shown as a share of net sales, about 50% here. Take out all those other costs as well and you get profit margin, which comes out lower.

When a Sale Lifts Revenue but Cuts Gross Profit

It's easy to assume more revenue always means more gross profit. When you run a discount, that isn't a given.

In a normal week the store sells 20 pairs of earbuds at $120. That's $2,400 in sales and $960 in gross profit.

Then it runs 15% off. The price drops to $102, but each pair still costs $72, so you're left with $30 a pair instead of $48. That week it sells 30 pairs.

Sales: $2,400 → $3,060, up 27.5%
Gross profit: $960 → $900, down $60

You got more orders and more revenue, but less money to cover the week's costs. That's why you should judge a discount by gross profit, not sales. Our guide to measuring discount ROI and gross profit shows how to check a campaign. If you're still picking a number, start with choosing a discount percentage.

In Growth Suite, our app, you can set a maximum discount for its offers, so none of them go past what your gross profit can handle.

Finding Gross Profit in Shopify

Shopify gets the cost side of gross profit from one field, Cost per item. You'll find it in the pricing section of each product, and each variant can have its own cost.

Once it's filled in, Shopify shows that item's profit and margin next to the price. Its profit reports use those same costs across your orders. A few things to watch out for:

Blank costs. With no cost entered, Shopify has nothing to subtract, so your gross profit is off.
Full price only. The product page uses your list price. Discounts come off later, so a discounted order earns less than it shows.
Other costs left out. It doesn't count shipping labels, payment fees or ads.
Old costs. If a supplier raises prices and you forget to update the field, your gross profit looks better than it really is.

Related Terms

Cost of Goods Sold (COGS): the cost you subtract from net sales.
Breakeven Point: where gross profit covers all your other costs.
Discount Percentage: the share taken off a price.
Return on Investment (ROI): a way to tell if a campaign earned more than it cost.