Profitability
How to Calculate Gross Profit: Formula, Example, and Free Calculator
Gross profit is the first and most important measure of whether your pricing works. Here's the formula, a step-by-step example, and how to use the number to make better business decisions.
What Is Gross Profit?
Gross profit is the money left over after subtracting the direct costs of producing your product or service from your revenue. It answers a simple question: after paying for what you sell, how much do you have left to cover everything else?
Gross Profit = Revenue − Cost of Goods Sold (COGS)
Source: GAAP accounting standards (ASC 606 revenue recognition; COGS defined per IAS 2 / ASC 330).
Step-by-Step Example
Let's walk through a real example for a small e-commerce business selling handmade candles.
Step 1: Find Your Revenue
Total sales before any deductions.
Revenue = 1,000 candles × $25 each = $25,000
Step 2: Calculate COGS
Add up all direct costs per unit.
Wax + wick + fragrance: $4.00
Jar + label + packaging: $3.50
Direct labor per candle: $2.50
Total COGS per unit: $10
Total COGS = 1,000 × $10 = $10,000
Step 3: Apply the Formula
Subtract COGS from revenue to find gross profit.
Gross Profit = $25,000 − $10,000 = $15,000
Gross Margin = ($15,000 ÷ $25,000) × 100 = 60%
This means 60 cents of every dollar stays after covering product costs. The remaining 40 cents goes to materials and direct labor. The $15,000 gross profit then covers operating expenses (rent, marketing, salaries) — whatever is left is net profit.
What Gross Profit Tells You
Pricing check
If gross profit is too low, your price doesn't cover the cost to make or deliver your product. Use our selling price calculator to find the price you need for a target margin.
Cost control signal
Falling gross profit over time means your direct costs are rising faster than prices. This could be material costs, supplier pricing, or production efficiency. Use our COGS calculator to track per-unit costs.
Product mix insight
Different products have different gross profits. Knowing per-product gross profit helps you decide which products to promote, discount, or discontinue. Use our profit margin calculator to compare margins across your lineup.
Gross Profit vs Other Profit Metrics
| Metric | Formula | What It Measures |
|---|---|---|
| Gross Profit | Revenue − COGS | Product profitability before overhead |
| Operating Profit | Gross Profit − Operating Expenses | Profit from core business operations |
| Net Profit | Operating Profit − Interest & Taxes | Bottom-line profit after all costs |
| Contribution Margin | Revenue − Variable Costs | Per-unit profitability for pricing decisions |
For a deeper comparison, see our guides on gross margin vs net margin and contribution margin vs gross margin.
Typical Gross Margins by Industry
| Industry | Typical Gross Margin | Why |
|---|---|---|
| Software / SaaS | 70–85% | Low marginal cost per additional user |
| Consulting / Services | 50–80% | Primary cost is billable labor |
| E-commerce (retail) | 40–55% | Cost of goods + shipping + transaction fees |
| Restaurant | 30–40% | Food cost is ~30% of menu price |
| Construction | 20–35% | Materials + subcontractors are high direct costs |
| Grocery / Food Retail | 20–30% | Thin margins on commodity goods; volume-driven |
Source: IBISWorld industry financial ratios (2026), NYU Stern Damodaran margin dataset. See our profit margin by industry guide for detailed industry-specific data.
Calculate Your Gross Profit
Enter your revenue and costs into one of these free calculators to see your real gross profit and margin.
Frequently asked questions
What is the difference between gross profit and net profit?+
Gross profit only subtracts cost of goods sold (COGS) from revenue. Net profit subtracts all expenses — COGS, operating expenses (rent, salaries, marketing), interest, and taxes. A business can have high gross profit but low net profit if operating expenses are too high. Both numbers are important: gross profit tells you if your product pricing works; net profit tells you if your entire business model works.
What is a good gross profit margin?+
It varies by industry. Service businesses often see 50-80% gross margins because they have low direct costs. Product businesses range from 30-60%. Restaurants average 30-40%. Retail typically runs 40-50%. Software companies can achieve 70-90%. See our profit margin by industry guide for detailed benchmarks across 12 industries.
Does gross profit include rent, salaries, or marketing costs?+
No. Gross profit only subtracts cost of goods sold — the direct costs of producing or delivering your product or service. Rent, salaried employee wages, marketing, insurance, and administrative costs are operating expenses, not COGS. They are subtracted later to calculate operating profit and net profit.
Can gross profit be negative?+
Yes. If your cost of goods sold exceeds your revenue, your gross profit is negative. This means you are selling each unit at a loss before accounting for any operating expenses. A negative gross profit is a serious warning sign — it means either your prices are too low, your direct costs are too high, or both can't cover each other.
How often should I calculate gross profit?+
Most businesses calculate gross profit monthly for regular financial reporting, and review it quarterly for strategic decisions. If you manufacture or sell physical products, calculate it per product or product line — some items may have healthy margins while others drag the average down. Use our profit margin calculator to compare margins across your products or services.