Difference Between Gross and Net Profit

Alpha Insights tracks both gross profit and net profit. Understanding the difference is crucial for accurate business analysis.

How Alpha Insights Calculates Profit

Alpha Insights uses standard accounting formulas for all profit calculations:

	Gross Revenue = Revenue before taxes & refunds are subtracted

	Net Revenue = Gross Revenue - Taxes - Refunds

	Gross Profit = Net Revenue - (Product Costs + Shipping Costs + Payment Gateway Fees + Custom Order Costs)

	Gross Profit Margin % = (Gross Profit / Net Revenue) * 100

	Net Profit = Gross Profit - Operating Expenses

	Net Profit Margin % = (Net Profit / Net Revenue) * 100

Gross Profit

What It Includes

Gross profit shows profit after deducting direct costs (costs directly tied to each order):

• Product costs (cost of goods sold)
• Shipping costs
• Payment gateway fees
• Custom per-order costs

What It Excludes

• Operating expenses (rent, salaries, software, utilities)
• Advertising spend (part of operating expenses)
• Fixed business costs

Example Calculation

	Gross Revenue: $10,000
Taxes: $0
Refunds: $0
Net Revenue: $10,000

Net Revenue: $10,000
- Product Costs: $4,000
- Shipping Costs: $600
- Payment Fees: $300
€€€€€€€€€€€€€€€€€€€
Gross Profit: $5,100

Gross Profit Margin = ($5,100 / $10,000) * 100 = 51%

Why It Matters

Gross profit shows if your:

• Pricing covers direct costs
• Product margins are healthy
• Business model is fundamentally profitable

Benchmark: Target 40-60% gross margin for healthy eCommerce

Net Profit

What It Includes

Net profit is what you actually keep after ALL costs, including operating expenses:

• All gross profit deductions (above)
• PLUS: Rent, salaries, software, utilities
• PLUS: Advertising spend (Facebook Ads, Google Ads, etc.)
• PLUS: All other business expenses

Example Calculation

	Gross Profit: $5,100 (from above)
- Operating Expenses: $4,600
  (Rent: $2,000 + Salaries: $1,500 + Software: $300 + Ad Spend: $800)
€€€€€€€€€€€€€€€€€€€
Net Profit: $500

Net Profit Margin = ($500 / $10,000) * 100 = 5%

Why It Matters

Net profit shows:

• True take-home profit
• If business is actually profitable overall
• What you actually keep after ALL costs

Benchmark: Target 10-25% net margin for sustainable business

Side-by-Side Comparison

Real-World Example

Scenario: Successful Products, Unprofitable Business

	Monthly Performance:

Gross Revenue: $50,000
- Taxes: $0
- Refunds: $0
Net Revenue: $50,000

Net Revenue: $50,000
- Product Costs: $20,000
- Shipping: $2,500
- Payment Fees: $1,500
€€€€€€€€€€€€€€€€€€€
Gross Profit: $26,000
Gross Profit Margin = ($26,000 / $50,000) * 100 = 52% GOOD

Gross Profit: $26,000
- Operating Expenses: $27,000
  (Rent + Salaries + Software + Ads: $27,000)
€€€€€€€€€€€€€€€€€€€
Net Profit: -$1,000 (LOSS) BAD
Net Profit Margin = (-$1,000 / $50,000) * 100 = -2%

Interpretation:

• Gross margin is excellent (52%)
• Products are priced well
• BUT: Operating expenses too high
• Business losing money overall

Action needed:

• Reduce ad spend or improve ROAS
• Cut operating expenses
• Or increase sales volume to spread fixed costs

When to Focus on Each

Focus on Gross Profit When

• Setting product prices
• Negotiating with suppliers
• Evaluating product profitability
• Making inventory decisions
• Comparing product margins

Focus on Net Profit When

• Assessing overall business health
• Making hiring decisions
• Planning major investments
• Evaluating marketing ROI
• Preparing financial statements

In Alpha Insights Reports

Where to Find Each

Gross Profit:

• Dashboard → Gross Profit metric card
• Reports → Sales Overview
• Individual order profit breakdowns

Net Profit:

• Dashboard → Net Profit metric card
• Reports → Profit & Loss Statement
• Reports → Store Performance

Viewing Both Together

Create custom report with:

• Metric cards: Gross Profit and Net Profit side-by-side
• Line chart: Both trending over time
• See relationship between the two

Common Misconceptions

Myth: High Gross Profit = Profitable Business

Wrong! You can have 60% gross margin but still lose money if expenses are too high

Myth: Focus Only on Revenue

Wrong! Revenue means nothing without knowing profit

Right: Focus on net profit - that's what you actually keep

Myth: Gross Profit Doesn't Matter

Wrong! Gross profit shows if your pricing and products are fundamentally sound

Right: Need both gross AND net to understand full picture

Improving Both Profits

Increase Gross Profit

1. Raise prices
2. Negotiate lower product costs
3. Reduce shipping costs
4. Minimize payment fees

Increase Net Profit

1. Everything that improves gross profit
2. PLUS: Cut operating expenses
3. PLUS: Optimize ad spend (improve ROAS)
4. PLUS: Improve operational efficiency