How to calculate gross profit

Your ecommerce business’s gross profit margin is one of the most important factors for you to monitor. Here’s why.

By Jason Hesse

Gross profit is the amount by which revenue from sales exceeds costs in a business.

In other words, how much money you’re making from your sales, after the costs associated with your sales – ie materials and labour – are paid for. To calculate it is easy: gross profit is your total revenue minus the cost of goods sold.

More important is your gross profit margin. It’s an extremely important ratio for every business to monitor.

Managing your margin will help you to avoid issues surrounding pricing that is too low and costs that are too high. When a website is generating adequate sales but margins are low, it signals an issue in one of both of these areas.

The calculation is also simple: gross profit / total revenue = profit margin.

Imagine an ecommerce website whose gross profit for the year was £81,042 and its total revenue was £202,605. What is its gross margin?

£81,042 gross profit / £202,605 total revenue = 0.40

This means that it has a gross profit margin of 40 per cent.

There is no ecommerce average for gross profit margin, as this varies widely depending on many factors (including what the site sells, time of year, etc), but there are websites that offer classic industry averages, for example: http://biz.yahoo.com/p/sum_qpmd.html

It is more interesting, however, to monitor your own gross profit margin to see whether you can run your business more efficiently.

The higher the margin, the more efficient is your business. And the more money you will make.