Gross Profit

Industry:

Market-Wide

Efficiency

Profitability

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Short Definition

Gross Profit ($) is revenue minus Cost of Sales — i.e., the money left after the direct costs to make and deliver your product/service.

Short Definition

Gross Profit ($) is revenue minus Cost of Sales — i.e., the money left after the direct costs to make and deliver your product/service.

Short Definition

Gross Profit ($) is revenue minus Cost of Sales — i.e., the money left after the direct costs to make and deliver your product/service.

Why it matters for Investors

  • Pricing power & unit economics: Higher gross profit means more value per sale.

  • Fuel for growth: Pays for OpEx (S&M, R&D, G&A); more Gross Profit (GP) → more to invest.

  • Comparability: Lets you compare products, channels, and companies fairly.

Why it matters for Investors

  • Pricing power & unit economics: Higher gross profit means more value per sale.

  • Fuel for growth: Pays for OpEx (S&M, R&D, G&A); more Gross Profit (GP) → more to invest.

  • Comparability: Lets you compare products, channels, and companies fairly.

Why it matters for Investors

  • Pricing power & unit economics: Higher gross profit means more value per sale.

  • Fuel for growth: Pays for OpEx (S&M, R&D, G&A); more Gross Profit (GP) → more to invest.

  • Comparability: Lets you compare products, channels, and companies fairly.

Formula

Direct costs are the “make + deliver” costs that go up with each sale.

They include: parts/materials (the BOM), workers who build/fulfill, shipping materials to you (inbound freight), storage/packing/returns, servers/hosting/CDN to deliver the product, third-party API/data fees, credit-card/payment processing fees, and partner/marketplace fees (take rate).

Practical considerations -

  • Set the rulebook: Write what sits in COGS vs OpEx — and stick to it.

  • Match bases: If revenue is “adjusted,” use matching COGS (and reconcile to GAAP).

  • Delivery costs belong in COGS: Hosting/CDN, payments, APIs, freight, packaging.

  • Pass-throughs: If you gross up revenue, include the matching costs in COGS (or report net).

  • Per-product tracking: View GP by SKU/plan/channel/region; blends hide leakage.

  • Clean up one-offs: Flag unusual items (write-offs, true-ups) so trends stay clear.

Formula

Direct costs are the “make + deliver” costs that go up with each sale.

They include: parts/materials (the BOM), workers who build/fulfill, shipping materials to you (inbound freight), storage/packing/returns, servers/hosting/CDN to deliver the product, third-party API/data fees, credit-card/payment processing fees, and partner/marketplace fees (take rate).

Practical considerations -

  • Set the rulebook: Write what sits in COGS vs OpEx — and stick to it.

  • Match bases: If revenue is “adjusted,” use matching COGS (and reconcile to GAAP).

  • Delivery costs belong in COGS: Hosting/CDN, payments, APIs, freight, packaging.

  • Pass-throughs: If you gross up revenue, include the matching costs in COGS (or report net).

  • Per-product tracking: View GP by SKU/plan/channel/region; blends hide leakage.

  • Clean up one-offs: Flag unusual items (write-offs, true-ups) so trends stay clear.

Formula

Direct costs are the “make + deliver” costs that go up with each sale.

They include: parts/materials (the BOM), workers who build/fulfill, shipping materials to you (inbound freight), storage/packing/returns, servers/hosting/CDN to deliver the product, third-party API/data fees, credit-card/payment processing fees, and partner/marketplace fees (take rate).

Practical considerations -

  • Set the rulebook: Write what sits in COGS vs OpEx — and stick to it.

  • Match bases: If revenue is “adjusted,” use matching COGS (and reconcile to GAAP).

  • Delivery costs belong in COGS: Hosting/CDN, payments, APIs, freight, packaging.

  • Pass-throughs: If you gross up revenue, include the matching costs in COGS (or report net).

  • Per-product tracking: View GP by SKU/plan/channel/region; blends hide leakage.

  • Clean up one-offs: Flag unusual items (write-offs, true-ups) so trends stay clear.

Worked Example

Line Item

Amount

Notes

Revenue

$50,000,000

Per policy (GAAP or non-GAAP; match with COGS)

Inventory/Bill of Materials + Inbound Freight

$18,500,000

Product Cost

Warehousing/ Packaging/ Returns

$3,000,000

Fulfilment & reverse logistics

Third-party APIs/ Processing

$1,000,000

Delivery-linked data/ API/ Processing

Total Cost of Sales

$22,500,000

$18.5M+$3M+$1M

Gross Profit

$27,500,000

Revenue - Cost of Sales


Notes:

  • Don’t mix bases: If revenue is non-GAAP, COGS must be non-GAAP (with reconciliation).

  • Pass-throughs: If you gross up revenue for pass-through items, include matching costs in COGS (or report net).

  • Multi-product: Always review GP by SKU/plan/channel to find margin leaks.

Worked Example

Line Item

Amount

Notes

Revenue

$50,000,000

Per policy (GAAP or non-GAAP; match with COGS)

Inventory/Bill of Materials + Inbound Freight

$18,500,000

Product Cost

Warehousing/ Packaging/ Returns

$3,000,000

Fulfilment & reverse logistics

Third-party APIs/ Processing

$1,000,000

Delivery-linked data/ API/ Processing

Total Cost of Sales

$22,500,000

$18.5M+$3M+$1M

Gross Profit

$27,500,000

Revenue - Cost of Sales


Notes:

  • Don’t mix bases: If revenue is non-GAAP, COGS must be non-GAAP (with reconciliation).

  • Pass-throughs: If you gross up revenue for pass-through items, include matching costs in COGS (or report net).

  • Multi-product: Always review GP by SKU/plan/channel to find margin leaks.

Worked Example

Line Item

Amount

Notes

Revenue

$50,000,000

Per policy (GAAP or non-GAAP; match with COGS)

Inventory/Bill of Materials + Inbound Freight

$18,500,000

Product Cost

Warehousing/ Packaging/ Returns

$3,000,000

Fulfilment & reverse logistics

Third-party APIs/ Processing

$1,000,000

Delivery-linked data/ API/ Processing

Total Cost of Sales

$22,500,000

$18.5M+$3M+$1M

Gross Profit

$27,500,000

Revenue - Cost of Sales


Notes:

  • Don’t mix bases: If revenue is non-GAAP, COGS must be non-GAAP (with reconciliation).

  • Pass-throughs: If you gross up revenue for pass-through items, include matching costs in COGS (or report net).

  • Multi-product: Always review GP by SKU/plan/channel to find margin leaks.

Best Practices

  • Publish definitions of Revenue and COGS; apply consistently period-to-period.

  • Keep delivery costs in COGS (hosting, payments, APIs, freight, packaging, returns).

  • Update reserves and rates monthly (returns, warranties, inventory, cloud rate cards).

  • Segment (product, customer size, channel, region) and review price–mix–volume–cost drivers.

  • Report both Gross Profit ($) and Gross Margin (%); watch incremental margin on new revenue.

Best Practices

  • Publish definitions of Revenue and COGS; apply consistently period-to-period.

  • Keep delivery costs in COGS (hosting, payments, APIs, freight, packaging, returns).

  • Update reserves and rates monthly (returns, warranties, inventory, cloud rate cards).

  • Segment (product, customer size, channel, region) and review price–mix–volume–cost drivers.

  • Report both Gross Profit ($) and Gross Margin (%); watch incremental margin on new revenue.

Best Practices

  • Publish definitions of Revenue and COGS; apply consistently period-to-period.

  • Keep delivery costs in COGS (hosting, payments, APIs, freight, packaging, returns).

  • Update reserves and rates monthly (returns, warranties, inventory, cloud rate cards).

  • Segment (product, customer size, channel, region) and review price–mix–volume–cost drivers.

  • Report both Gross Profit ($) and Gross Margin (%); watch incremental margin on new revenue.

FAQs

  1. Gross Profit vs. Gross Margin?
    Gross Profit is a dollar amount. Gross Margin (%) = Gross Profit ÷ Revenue × 100.

  2. What belongs in COGS?
    Only direct costs to make/deliver the product/service (see list above). Sales/marketing, R&D, and G&A are OpEx, not COGS.

  3. Where do shipping and payment fees go?
    If they’re required to deliver/fulfil the sale, put them in COGS.

  4. Can Gross Profit be negative?
    Yes — heavy discounting, high returns, or high variable costs can push COGS above revenue.

  5. Gross Profit vs. Contribution Margin?
    Contribution Margin subtracts all variable costs (may include some OpEx); Gross Profit subtracts COGS only.

  6. Gross Profit vs. Operating Income?
    Operating Income = Gross Profit − OpEx (Sales and Marketing Expense, Research and Development Expense, General and Administrative Expense).

FAQs

  1. Gross Profit vs. Gross Margin?
    Gross Profit is a dollar amount. Gross Margin (%) = Gross Profit ÷ Revenue × 100.

  2. What belongs in COGS?
    Only direct costs to make/deliver the product/service (see list above). Sales/marketing, R&D, and G&A are OpEx, not COGS.

  3. Where do shipping and payment fees go?
    If they’re required to deliver/fulfil the sale, put them in COGS.

  4. Can Gross Profit be negative?
    Yes — heavy discounting, high returns, or high variable costs can push COGS above revenue.

  5. Gross Profit vs. Contribution Margin?
    Contribution Margin subtracts all variable costs (may include some OpEx); Gross Profit subtracts COGS only.

  6. Gross Profit vs. Operating Income?
    Operating Income = Gross Profit − OpEx (Sales and Marketing Expense, Research and Development Expense, General and Administrative Expense).

FAQs

  1. Gross Profit vs. Gross Margin?
    Gross Profit is a dollar amount. Gross Margin (%) = Gross Profit ÷ Revenue × 100.

  2. What belongs in COGS?
    Only direct costs to make/deliver the product/service (see list above). Sales/marketing, R&D, and G&A are OpEx, not COGS.

  3. Where do shipping and payment fees go?
    If they’re required to deliver/fulfil the sale, put them in COGS.

  4. Can Gross Profit be negative?
    Yes — heavy discounting, high returns, or high variable costs can push COGS above revenue.

  5. Gross Profit vs. Contribution Margin?
    Contribution Margin subtracts all variable costs (may include some OpEx); Gross Profit subtracts COGS only.

  6. Gross Profit vs. Operating Income?
    Operating Income = Gross Profit − OpEx (Sales and Marketing Expense, Research and Development Expense, General and Administrative Expense).

Related Metrics


Parents: Revenue, COGS / Cost of Sales


Children / Components: Gross Margin (%), SKU/channel/region gross profit cuts


Commonly mistaken for: Contribution Margin, Operating Income, EBITDA, Net Income

Related Metrics


Parents: Revenue, COGS / Cost of Sales


Children / Components: Gross Margin (%), SKU/channel/region gross profit cuts


Commonly mistaken for: Contribution Margin, Operating Income, EBITDA, Net Income

Related Metrics


Parents: Revenue, COGS / Cost of Sales


Children / Components: Gross Margin (%), SKU/channel/region gross profit cuts


Commonly mistaken for: Contribution Margin, Operating Income, EBITDA, Net Income

Back to Metric-dictionary

‹ Sales and Marketing Expenses

‹ Sales and Marketing Expenses

Cost of Sales ›

Cost of Sales ›

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Index

Short Definition

Why it matters for Investors

Formula

Worked Example

Best Practices

FAQs

Related Metrics

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