Understanding how much money your business earns after covering product costs is essential for making informed financial decisions. Ecommerce sellers may generate thousands of dollars in sales across Amazon, eBay, and Shopify, but high revenue does not always mean strong profitability.
Knowing how to calculate gross profit helps you understand how much revenue remains after deducting the direct costs of the products you sell. It also allows you to evaluate product pricing, monitor inventory costs, and identify opportunities to improve profitability.
In this guide, you’ll learn the gross profit formula, how to calculate it step by step, how it differs from gross profit margin and net profit, and how ecommerce sellers can use accurate bookkeeping to monitor their financial performance.
What Is Gross Profit?
Gross profit is the amount of money a business retains from its sales revenue after subtracting the direct costs associated with producing or purchasing the products it sells.
These direct costs are generally recorded as Cost of Goods Sold (COGS). For an ecommerce business, they may include product purchase prices, manufacturing costs, and other eligible costs directly associated with bringing inventory into a saleable condition.
For example, if an online store generates $10,000 in net sales and spends $4,000 on the products sold, its gross profit is $6,000.
Gross profit helps business owners understand whether their products are generating enough revenue to cover their direct costs before accounting for general operating expenses.
Why Is Gross Profit Important?
Tracking gross profit helps ecommerce sellers:
- Evaluate product profitability: Identify which products generate more revenue after direct costs.
- Review pricing decisions: Determine whether selling prices adequately cover product costs.
- Monitor inventory expenses: Understand how purchasing and stock levels affect profitability.
- Compare business performance: Track changes in profitability across different months or financial periods.
- Plan business growth: Determine how much money remains to cover operating expenses and support future investments.
How to Calculate Gross Profit
The basic calculation requires two figures: net sales revenue and Cost of Goods Sold (COGS).
Gross Profit Formula
Gross Profit = Net Revenue − Cost of Goods Sold (COGS)
Where:
- Net Revenue: Sales revenue after deducting applicable returns, refunds, and discounts.
- COGS: Direct costs associated with the products sold during a specific period.
For example, suppose an ecommerce store generates $15,000 in net sales and its COGS is $6,000.
Gross Profit = $15,000 − $6,000
Gross Profit = $9,000
This means the business retains $9,000 after covering the direct costs of its products. This amount is available to cover operating expenses and contribute toward net profit.
Step-by-Step Gross Profit Calculation
Follow these steps to calculate gross profit accurately:
Step 1: Determine Your Net Sales Revenue
Start by calculating total sales revenue for the selected period. Subtract applicable sales returns, refunds, and discounts from gross sales.
Net Sales = Gross Sales − Returns − Discounts
For example:
| Description | Amount |
| Gross Sales | $12,000 |
| Returns and Refunds | $500 |
| Discounts | $300 |
| Net Sales | $11,200 |
Sales taxes collected on behalf of tax authorities should generally be excluded from revenue.
Step 2: Calculate Your Cost of Goods Sold
Next, identify the direct costs associated with the products sold during the same period.
For inventory-based businesses, a common formula is:
COGS = Opening Inventory + Net Purchases + Direct Inventory Costs − Closing Inventory
For example:
| Description | Amount |
| Opening Inventory | $2,000 |
| Net Purchases | $5,000 |
| Eligible Freight-In Costs | $300 |
| Closing Inventory | $1,800 |
| Total COGS | $5,500 |
Only include costs that qualify as inventory costs under your accounting method and applicable accounting standards.
Step 3: Subtract COGS from Net Sales
Once you have both figures, subtract COGS from net sales revenue.
Gross Profit = $11,200 − $5,500
Gross Profit = $5,700
The business has generated $5,700 in gross profit for the selected period.
What Costs Are Included in the Cost of Goods Sold (COGS)?
Cost of Goods Sold represents the direct costs associated with the products a business has sold. Accurate COGS records are essential because incorrect cost allocation can make gross profit appear higher or lower than it actually is.
For ecommerce sellers, common COGS components may include:
1. Product Purchase Costs
The amount paid to suppliers or manufacturers to acquire products for resale is generally a major component of COGS.
For example, if a seller purchases 100 units at $15 each, the total product purchase cost is $1,500.
2. Raw Materials and Manufacturing Costs
Businesses that manufacture their own products may include raw materials, components, and direct production labor in inventory costs.
These expenses help determine the actual cost of producing each unit.
3. Packaging Costs
Packaging materials used directly to prepare products for sale may qualify as inventory or product costs, depending on their purpose and accounting treatment.
4. Freight-In and Shipping Costs
Transportation costs required to bring purchased inventory to your warehouse or business location may be included in inventory costs.
However, shipping products to customers is a separate consideration and may be recorded as a fulfillment or selling expense depending on the accounting policy.
5. Opening and Closing Inventory
Inventory values directly affect COGS.
Opening inventory represents the value of stock available at the beginning of a period, while closing inventory represents the value of unsold stock remaining at the end.
Accurate stock counts and inventory valuation help ensure that only the cost of products sold is recognized in the appropriate period.
Gross Profit Calculation Example for an Ecommerce Business
Let’s consider an ecommerce seller operating across Amazon, eBay, and Shopify.
During one month, the seller records the following financial figures:
| Description | Amount |
| Gross Sales | $12,000 |
| Returns and Discounts | $800 |
| Net Sales Revenue | $11,200 |
| Product Purchase Costs | $5,000 |
| Eligible Freight-In Costs | $300 |
| Opening Inventory | $2,000 |
| Closing Inventory | $1,800 |
| Total COGS | $5,500 |
| Gross Profit | $5,700 |
Using the formula:
Gross Profit = Net Sales − COGS
Gross Profit = $11,200 − $5,500
Gross Profit = $5,700
This example shows why ecommerce sellers should track sales adjustments and inventory costs together. Looking only at total marketplace sales would not provide an accurate picture of product profitability.
Marketplace commissions, payment processing charges, advertising costs, and other selling expenses should also be tracked separately when they are not classified as COGS under the business’s accounting policy.
How to Calculate Gross Profit Margin
Understanding how to calculate gross profit also helps ecommerce sellers determine their gross profit margin. Gross profit shows the amount earned after direct product costs, while gross profit margin expresses that amount as a percentage of net sales revenue.
This percentage makes it easier to compare profitability across products, sales channels, and financial periods.
Gross Profit Margin Formula
Gross Profit Margin = (Gross Profit ÷ Net Sales Revenue) × 100
For example, suppose an online store generates $20,000 in net sales and has $8,000 in COGS.
Gross Profit = $20,000 − $8,000 = $12,000
Gross Profit Margin = ($12,000 ÷ $20,000) × 100
Gross Profit Margin = 60%
This means the business retains $0.60 in gross profit for every dollar of net sales before operating expenses.
What Is a Good Gross Profit Margin?
There is no single gross profit margin that works for every business. The appropriate percentage depends on the industry, product category, pricing strategy, supplier costs, and operating model.
For example, a business selling low-cost everyday products may operate with a different margin structure than a brand selling premium or specialized products.
Ecommerce sellers should compare their margins with:
- Previous monthly and yearly performance.
- Similar products within their category.
- Different sales channels.
- Changes in supplier and inventory costs.
Regular comparisons help identify declining margins and areas where pricing or purchasing decisions may need attention.
Gross Profit vs. Gross Profit Margin vs. Net Profit
These three financial terms are related, but each measures a different aspect of business performance.
| Metric | What It Measures | Formula |
| Gross Profit | Money remaining after direct product costs | Net Sales − COGS |
| Gross Profit Margin | Gross profit expressed as a percentage | (Gross Profit ÷ Net Sales) × 100 |
| Net Profit | Remaining earnings after all applicable expenses | Total Revenue − Total Expenses |
Gross Profit vs. Net Profit
Gross profit focuses on the direct costs of products sold, whereas net profit accounts for additional business expenses.
For an ecommerce business, these additional expenses may include:
- Marketplace selling fees.
- Advertising and marketing costs.
- Software subscriptions.
- Office rent and utilities.
- Administrative expenses.
- Interest and applicable taxes.
A business can have a positive gross profit but still report a net loss if its operating and other expenses exceed the amount available after direct product costs.
Understanding both figures helps sellers evaluate product-level profitability and overall financial performance.
Common Mistakes That Affect Gross Profit Calculations
Even small bookkeeping errors can affect reported profitability. Ecommerce businesses managing multiple sales channels should pay particular attention to the following issues.
1. Incorrect Inventory Valuation
Inaccurate opening or closing inventory figures can distort COGS. Regular inventory reconciliation helps maintain reliable cost records.
2. Ignoring Returns and Discounts
If refunds and discounts are not recorded correctly, net sales revenue may be overstated. Sellers should account for these adjustments when calculating revenue.
3. Mixing Direct Costs with Operating Expenses
Recording product-related costs as general expenses, or treating operating expenses as COGS, can distort gross profit.
Maintain clear expense categories and apply a consistent accounting policy.
4. Using Sales Revenue Instead of Net Sales
Calculating gross profit from gross sales without accounting for applicable returns and discounts can produce misleading results.
5. Recording Costs in the Wrong Period
Product costs should be matched with the period in which the related products are sold. Timing differences can affect monthly and yearly financial comparisons.
How Ecommerce Sellers Can Improve Gross Profit
Once you understand your product costs and sales performance, you can take practical steps to improve profitability.
1. Review Product Pricing: Evaluate whether your selling prices adequately cover product costs and leave sufficient room for other business expenses.
2. Negotiate Supplier Costs: Compare suppliers, review purchasing terms, and explore bulk discounts where they make financial sense.
3. Monitor Inventory Levels: Avoid unnecessary overstocking and review slow-moving products to reduce excess inventory costs.
4. Analyze Product Performance: Identify products with stronger or weaker gross margins and adjust purchasing or pricing strategies accordingly.
5. Review Returns and Discounts: Monitor refund rates and promotional discounts to understand how they affect net sales and profitability.
6. Track Channel-Level Costs: Review the costs associated with selling on Amazon, eBay, and Shopify separately to understand differences in overall channel performance.
How Bookkeeping Helps Ecommerce Sellers Track Gross Profit
Accurate bookkeeping helps ecommerce businesses maintain organized sales, inventory, expense, and COGS records. Without consistent financial tracking, calculating gross profit across multiple sales channels can become difficult.
For sellers using Amazon, eBay, and Shopify, sales data may include orders, refunds, marketplace fees, taxes, settlements, and disbursements. These records need to be organized correctly to support reliable financial reporting.
PlugBooks helps ecommerce sellers manage their financial records by connecting sales channel data with bookkeeping workflows.
With PlugBooks, sellers can:
- Track sales, refunds, fees, and other marketplace transactions.
- Organize COGS and product-related expenses.
- Review settlement and disbursement records.
- Connect bookkeeping workflows with QuickBooks and Xero.
- Generate financial reports to monitor business performance.
- Maintain organized records for monthly and yearly financial reviews.
By keeping sales and cost records organized, sellers can make more informed decisions about pricing, inventory, and business profitability.
Frequently Asked Questions
1. What Is the Formula for Calculating Gross Profit?
The gross profit formula is Net Sales Revenue minus Cost of Goods Sold (COGS). It shows how much revenue remains after deducting the direct costs of products sold.
2. How Do You Calculate Gross Profit From Sales?
Subtract the Cost of Goods Sold from net sales revenue. For example, if net sales are $10,000 and COGS is $4,000, gross profit is $6,000.
3. Is Gross Profit the Same as Net Profit?
No. Gross profit deducts direct product costs, while net profit accounts for operating expenses and other applicable costs, including interest and taxes.
4. What Is a Good Gross Profit Margin?
A good gross profit margin depends on the industry, product category, pricing strategy, and cost structure. Compare your margin with historical performance and relevant industry benchmarks.
5. Can Gross Profit Be Negative?
Yes. Gross profit becomes negative when COGS exceeds net sales revenue. This may happen because of high product costs, excessive discounting, inventory losses, or pricing issues.
6. Does Gross Profit Include Operating Expenses?
No. General operating expenses such as advertising, office rent, and administrative costs are generally excluded from gross profit calculations.
7. How Often Should a Business Calculate Gross Profit?
Businesses should review gross profit regularly, ideally monthly. More frequent reviews can help ecommerce sellers identify changes in product costs, pricing, and sales performance.
8. How Do You Calculate Gross Profit for Ecommerce Products?
Subtract the direct cost of the products sold from their net sales revenue. Include applicable product acquisition and inventory costs, and account for returns and discounts when calculating net sales.