How to Calculate Gross Profit

How to Calculate Gross Profit

Increasing gross profit is one of the best ways to grow the bottom line of your ecommerce store. But if it’s not consistently and accurately measured, it can’t be managed or improved. Analyzing profit will help you determine where you should focus your resources for future growth, where you should try to cut costs or raise prices and which revenue channels are driving the greatest margins

Why is measuring gross profit important?

How do you know your ecommerce store is healthy and growing? Revenue numbers are a go-to for most companies but Gross Profit can be a better indicator of business performance.    

Gross Profit is a financial metric used to evaluate a company’s profitability by determining the proportion of money left from revenue after accounting for the Cost of Goods Sold.  

Analyzing Gross Profit can provide insight into how well a company is allocating resources, pricing products and generating traffic. Calculating Gross Profit can also help ecommerce stores identify and address problems. If a business is generating healthy sales numbers but gross margins are low, it can signal direct costs are too high, prices are too low or issues with the supply chain.    

For marketers, Gross Profit performance can help determine the value of promotions. If your business runs a promotion to increase sales or shopping cart size, the Gross Profit of the promoted products reflects the success of each campaign. Marketers can use those metrics to predict the impact of future campaigns.

How to Calculate Gross Profit

Gross Profit is determined by subtracting Cost of Goods Sold from Net Revenue. You can calculate Gross Profit by day, week or month, and analyze the metric by store or product.

Gross Profit = Total Sales – Cost of Goods Sold

To accurately calculate Gross Profit you should understand the distinction between variable and fixed costs. Variable expenses are recorded as Costs of Goods Sold while fixed costs are considered operating expenses.

Variable costs include:

+ Raw Materials  

+ Packaging  

+ Shipping  

+ Direct labor costs  

+ Sales commissions

Fixed costs more static in nature include

+ Office expenses  

+ Payroll taxes  

+ Benefits  

+ Insurance  

+ Rent  

+ Salaries

When calculating Gross Profit, it’s important to keep the method consistent. Up to 80 percent of businesses have inconsistent definitions of profit margins. Companies with a consistent measure of gross margin are more likely to be growing ahead of market expectations. You’ll also want to keep profit margins in mind when introducing a new product. Is it in line with your Gross Profit objectives or will it drag margins down?

Improving Gross Profit

Once you begin to regularly measure Gross Profit, it’s easier to determine whether or not changes need to be made. If you determine you need to make improvements, there are several strategies you can use:  

1. Increase Prices

Increasing prices can improve profits, but can be risky because higher prices could cause sales to drop. Before deciding on a price increase, business owners should understand competitive factors, inflationary rates and demand for the products you are pricing.

2. Reduce Product Costs

Another method for improving Gross Profit is reducing material costs. This can be done by making products more efficiently, finding a new supplier or negotiating volume discounts.

3. Analyze Promotions

Merchandising and promotions can also be analyzed and improved to increase Gross Profit. Is there a way to better influence buying behaviors through merchandising tactics? Are you optimizing personalization techniques to present products that each segment of customer is more likely to buy?

4. Implement Dynamic Pricing

Dynamic pricing is a strategy in which prices change in response to real time movement in supply and demand. Dynamic pricing gives ecommerce businesses the ability to reduce prices when business is slow in order to improve sales and increase prices during high demand to improve profit.

Find Gross Profit Quickly with Glew

Calculating Gross Profit is easier for store owners using Glew’s analytics app. The Overview Dashboard provides a real-time view of how each key metric is performing, including Gross Profit.    

Glew also helps businesses easily calculate Cost of Goods Sold, which can be a cumbersome step to calculating Gross Profit. Using Glew’s Cost of Goods Sold tool, ecommerce stores can analyze accurate Gross Profit and sales margins. The tool allows users to import COGS data in bulk using a CSV template. It also provides the ability to modify COGS data for individual products.    

Integrated Cost of Goods Sold data in Glew helps ecommerce stores optimize advertising spend relative to product profitability and move away from a generalized approach to product marketing. Glew’s Performance Dashboard also helps users uncover profit insights.    

The dashboard ties profit to each advertising channel, giving business owners the ability to drill down and understand the Gross Profit of each channel. The Overview Dashboard provides a real-time view of how each metric is performing, including Gross Profit.