First, you need to understand the difference between gross profit and net profit and understand how your operating costs, cost of goods sold (COGS), pricing methodology, markdowns, and sales volumes all contribute to your store's profitability level.
Turning each of these elements into a science is the key to profitability.
In this article we cover the following topics:
What is gross profit and how to calculate it
What is gross profit margin and how to calculate it
What is net profit and how to calculate it
What factors contribute to profit margins?
What is the ideal profit margin?
5 Ways to Increase Your Profit Margins
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What is gross profit?
Gross profit is your total revenue minus the costs incurred to generate that revenue. In simple terms, gross profit is your sales minus your cost of goods sold (COGS). Your gross profit tells you how much money your business makes before paying other costs, such as salaries, marketing, utilities, and equipment, etc.
Gross Profit Calculation Formula
Your gross profit is calculated by subtracting your cost of goods sold from your sales. Expressed as a formula, this calculation looks like this:
Gross Profit Calculation Formula

Understanding Gross Profit
Let's say Johnny's Bikes sold $20,000 worth of Bike #1 in one month. Its inventory costs $10,000. So the gross profit on Bike #1 is $10,000.
During that same month, Johnny's Bikes sold $15,000 worth of Bike #2 and its cost of goods sold was only $2,000. So the gross profit on Bike #2 is $13,000.
Although bike #2 sold for less than bike #1, its gross profit is higher, making it a more profitable bike to sell.
What is gross profit margin?
Gross profit margin expresses gross profit as a percentage. The higher the percentage, the more profitable the item is for the company to sell.
Gross profit margin applies to a specific product that a company sells. Calculating gross profit margin allows companies to set prices that ensure the profitability of selling the product.
Formula for calculating gross profit margin
Calculating your gross profit margin is done by first subtracting your cost of goods sold from your sales, then dividing that amount by your sales. Expressed as a formula, this calculation looks like this:
Understanding Gross Profit Margin
Let's take the same example as for gross profit and study the gross profit margin for Johnny's Bikes bike #1 and bike #2.