Gross profit and net profit are not the same. Gross profit shows what remains after the direct cost of the products you sold. Net profit shows what remains after every business expense. An ecommerce store can report a healthy gross profit and still lose money once advertising, platform fees, returns, software and overhead are included.
This guide explains both figures, gives practical formulas and shows online sellers how to use them when pricing products and reviewing monthly performance.
Gross profit vs net profit: the quick difference
| Metric | What it measures | Basic formula |
|---|---|---|
| Gross profit | Profit after the direct cost of goods sold | Net sales − cost of goods sold |
| Net profit | Profit after all business expenses | Total revenue − total expenses |
Gross profit helps you judge product economics. Net profit tells you whether the entire business is actually profitable. You need both because each answers a different question.
How to calculate gross profit
Start with net sales: sales revenue after discounts, refunds and sales returns. Then subtract cost of goods sold, commonly called COGS.
Gross profit = net sales − cost of goods sold
For a product-based ecommerce business, COGS normally includes the purchase or manufacturing cost of units sold. It may also include inbound freight, customs duty and other costs required to bring those units into saleable condition when your accounting method treats them as inventory costs.
Suppose a store records $20,000 in sales, gives $1,000 in discounts and refunds, and has $7,600 in COGS:
- Net sales: $19,000
- COGS: $7,600
- Gross profit: $11,400
That figure does not yet include advertising, marketplace fees, payment processing, outbound shipping, software subscriptions, wages, insurance or rent.
How to calculate gross profit margin
A dollar figure is useful, but the percentage makes products and periods easier to compare.
Gross profit margin = gross profit ÷ net sales × 100
Using the example above, $11,400 divided by $19,000 gives a gross margin of 60%. Sellers often confuse margin with markup, which uses cost rather than selling price as its base. The SellersNest Profit Margin Calculator can check profit, margin and markup without mixing up the formulas.
How to calculate net profit
Net profit is the amount left after all expenses for the period have been deducted. A simple working formula is:
Net profit = total revenue − COGS − operating expenses − other expenses − tax
Continue the same monthly example. The store has $11,400 in gross profit, then pays:
- $3,000 for advertising
- $1,150 in marketplace and payment fees
- $1,300 for outbound shipping and packaging
- $650 for returns and reshipments
- $900 for software, insurance and other overhead
- $1,600 for wages and contractor costs
- $400 in interest and tax provisions
Total expenses after COGS are $9,000, leaving a net profit of $2,400. The store’s gross margin is 60%, but its net profit margin is only 12%.
Net profit margin = net profit ÷ total revenue × 100
Why gross profit can look good while cash disappears
Gross profit ignores many costs that online sellers feel every day. The most common gap comes from treating a sale as profitable before counting the full cost of fulfilling and acquiring it.
- Marketplace and payment fees: A percentage fee can remove a large part of the apparent margin.
- Advertising: Revenue from paid traffic is not automatically profitable revenue. Compare spend with contribution after product and order costs.
- Shipping and packaging: Free shipping is still an expense to the seller.
- Returns: Refunds, return labels, inspection, damaged inventory and customer support all reduce profit.
- Overhead: Software, accounting, insurance, storage and wages remain payable even when sales slow.
If you want to see what an individual order contributes before fixed overhead, read the guide to ecommerce contribution margin. That metric sits between gross profit and net profit and is especially useful for advertising and promotion decisions.
Which costs belong in COGS?
The exact accounting treatment depends on your business and jurisdiction, but consistency matters. Product purchase cost clearly belongs in COGS. Import freight, customs duty and preparation costs are often included in inventory cost because they are required to make the product ready for sale.
Outbound postage, marketplace commissions and advertising are usually tracked separately as selling or operating expenses. Do not move costs between categories simply to make gross margin look better. Use the same rules each month so the trend remains meaningful, and ask a qualified accountant how your business should report inventory and tax.
For imported stock, calculate the full landed cost per unit before deciding your selling price. Missing freight or duty understates COGS and creates a false gross profit.
Gross profit, contribution margin and net profit
| Level | Costs deducted | Best used for |
|---|---|---|
| Gross profit | COGS | Product and category margin |
| Contribution margin | COGS plus variable selling costs | Orders, ads, channels and promotions |
| Net profit | All variable and fixed expenses | Overall business performance |
Reviewing all three levels prevents misleading decisions. A product may have a strong gross margin but a weak contribution margin because it is expensive to advertise or ship. A profitable product line may still sit inside an unprofitable company if overhead has grown too quickly.
How online sellers should use these numbers
1. Compare products using gross margin
Track gross profit and gross margin by SKU or category. This shows which products create enough room to cover selling costs and overhead. A high-revenue item with weak margin may contribute less than a smaller product with better economics.
2. Test ads using contribution margin
Do not set an advertising budget from revenue alone. First deduct product cost, fees, fulfilment and expected returns. Then compare the remaining contribution with customer acquisition cost.
3. Review net profit monthly
A monthly profit and loss statement reveals whether total gross profit covers operating expenses. Compare both dollars and percentages over time. If sales rise but net margin falls, investigate discounting, ad costs, fees, returns and overhead.
4. Price from complete costs
A target gross margin is only the starting point. Your price also needs to absorb selling costs and a fair share of overhead while leaving net profit. Model fee-heavy marketplaces separately because the same product can have different net results by channel.
5. Track return costs honestly
Returns affect more than revenue. Use the Return Cost Calculator to estimate shipping, inspection and restocking costs, then include the monthly total in your profit review.
Common mistakes to avoid
- Using revenue instead of net sales after discounts and refunds.
- Calling gross profit “take-home profit.”
- Ignoring payment fees, shipping subsidies or return costs.
- Comparing gross margin for one month with net margin for another.
- Mixing markup and margin when setting prices.
- Counting unsold inventory as an immediate expense without following the business’s accounting method.
- Reviewing totals only and missing unprofitable products or channels.
A simple monthly profit review
Export sales, refunds, COGS and operating expenses for the same date range. Calculate gross profit first, then contribution by channel, then net profit for the whole business. Compare the result with the previous month and the same period last year where available.
Investigate the largest changes rather than every small variance. A falling gross margin usually points toward product cost, discounting or pricing. A stable gross margin with falling net profit usually points toward advertising, fulfilment, fees or overhead.
Final takeaway
Gross profit tells you whether your products create enough margin after their direct cost. Net profit tells you whether the business survives after every expense. Track gross profit by product, contribution margin by order or channel, and net profit for the company. That gives you a much clearer basis for pricing, advertising and growth decisions than sales revenue alone.