Gross profit is one of the best ways to measure the overarching financial success of your business. By definition, gross profit is “the profit a company makes after deducting the costs associated with making and selling its products and/or providing its services” (thanks, Investopedia!). You might already know gross profit from your accounting reports as it typically appears on an income statement. Beyond the technical explanation, we like gross profit because it gives valuable insights into areas of improvement for pricing and costs. We'll take you through how to calculate this metric, how to understand it in the context of your industry, and how to apply it to the platforms you're using now.
You can calculate gross profit by taking your revenue minus cost of goods sold (COGS). Gross profit can be assessed for various time-periods (i.e. day, week, month, year), and, for sales and costs tied to certain products or campaigns, you can find a specific gross profit for each.
If you’re confused about how to define revenue and COGS, we’ve included some nifty definitions and examples below:
Gross profit gives you a dollar amount, but sometimes it’s important to use percentages and fractions to better compare your profitability across time and business units. For instance, a $100 in gross profit means different things for firm A that generates $500 in revenue versus firm B that generates $1,000 in revenue. To fix this issue, we can calculate gross profit margin, which is gross profit divided by total revenue. From the previous example, it’s now easier to see firm A, at a gross profit margin of 20%, performs better than firm B, at a gross profit margin of 10%.
When choosing what to include in your calculations, remember: consistency is key! Having consistent metrics will allow you to better identify the causes of good or bad performance.
Again, as you begin (consistently) monitoring gross profit and gross profit margin, you’ll be able to find insights specific to your strategy. Of course, it’s also important to understand these metrics in relation to your broader industry. To help you know what to expect, we’ve included a list of average gross profit margin per industry (check out page 4 of this interactive dashboard for more stats):
Further, while you can find gross profit from many channels, we’ve identified popular platforms that are particularly relevant to gross profit. These may be good places to begin if you’re getting started with this metric:
While both gross profit and gross profit margin are easy to calculate, it’s important to keep in mind that they are two of many valuable metrics to track your performance. If you don’t want to spend hours at the end of the month juggling numbers from your Shopify and Stripe accounts, consider trying Lido. Lido can help you build a dashboard to monitor your data and give a look into how your key metrics (such as gross profit margin) change over time.
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