## 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

Aspect | Gross Profit | Net Profit
--- | --- | ---
Formula | Net Revenue - (Product Costs + Shipping + Gateway Fees + Custom Order Costs) | Gross Profit - Operating Expenses
Includes | Product, shipping, payment fees, custom order costs | ALL costs including operating expenses
Typical Margin | 40-60% | 10-25%
Shows | Product profitability | Business profitability
Best For | Pricing decisions | Overall health check

#### 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