Gross Profit: Your First Line of Defence
Gross profit is the most fundamental measure of product economics: how much money is left from each sale after paying for the product itself.
Gross Profit Formula
Gross Profit = Revenue − Cost of Goods Sold (COGS)
Gross Margin % = Gross Profit ÷ Revenue × 100
Example: £100,000 monthly revenue, £62,000 COGS
Gross profit = £38,000. Gross margin = 38%.
COGS for a typical e-commerce brand includes: purchase price from supplier, import duties and customs fees, inbound freight to warehouse, and any processing or preparation costs before items are stored.
COGS does not include: fulfillment of customer orders (outbound shipping), payment processing fees, returns, marketing costs, wages, or rent. These are operating expenses, which come below gross profit in the P&L.
Gross Margin Benchmarks by Sector
Supplements / health: 55–70% | Beauty: 50–65% | Fashion: 40–60% | Homeware: 35–50% | Electronics: 10–20%. A brand with gross margin significantly below sector benchmarks should investigate whether COGS is correctly calculated and competitive.
Operating Profit (EBITDA)
Operating profit — often reported as EBITDA — sits between gross profit and net profit. It deducts operating expenses (costs of running the business) but before interest, taxes, depreciation, and amortisation.
Operating Profit Formula
Operating Profit = Gross Profit − Operating Expenses
Operating expenses include: wages and salaries, warehouse rent and utilities, advertising and marketing spend, software tools and subscriptions, packaging and fulfillment costs, customer service costs.
EBITDA is the metric most often used by investors and acquirers when valuing e-commerce businesses. For a £5M revenue brand with 40% gross margin (£2M gross profit) and £1.2M operating expenses, EBITDA is £800,000 — an 16% margin, which would command a strong acquisition multiple.
Net Profit: The True Bottom Line
Net profit is what remains after every single cost has been paid: COGS, operating expenses, interest on any debt, and corporation tax.
Net Profit Formula
Net Profit = Revenue − COGS − Operating Expenses − Interest − Tax
Net profit is the definitive measure of business profitability — but it's a lagging indicator. It's reported monthly or quarterly and aggregates all activity. It's not directly useful for individual product or campaign decisions because it includes costs that can't be attributed to specific products.
Fixed vs Variable Costs: Why It Matters
Understanding whether costs are fixed or variable is critical for making advertising decisions and modelling growth scenarios.
| Cost Type | Fixed or Variable | Examples | Impact on Margins at Scale |
|---|---|---|---|
| COGS | Variable | Product purchase price, import duties | May improve (volume discounts) |
| Fulfillment | Variable | Pick, pack, ship, packaging | May improve at volume (carrier rates) |
| Payment processing | Variable (% of revenue) | Stripe, PayPal fees | Stable percentage |
| Advertising | Variable (chosen) | Google Ads, Meta Ads spend | CAC may rise as you saturate target audience |
| Warehouse rent | Fixed (mostly) | Premises cost per month | Dilutes as % of revenue with growth |
| Salaries (core team) | Fixed | Operations, finance, marketing team | Dilutes with revenue growth (until next hire) |
| Software tools | Fixed (mostly) | Shopify, GROW, Klaviyo | Dilutes significantly with scale |
The practical implication: as revenue grows, fixed costs dilute, which means gross margin improvement flows through to net profit at an accelerating rate. This is the operating leverage of e-commerce — why scaling a profitable model makes it more profitable over time.
The E-commerce P&L Walkthrough
WORKED EXAMPLE: Monthly P&L for a £400K Revenue Brand
| Gross Revenue | £420,000 |
| Less returns (£420K × 8% return rate) | (£33,600) |
| Net Revenue | £386,400 |
| Less COGS (40% of net revenue) | (£154,560) |
| Gross Profit | £231,840 (60%) |
| Less fulfillment (£7 per order × 3,200 orders) | (£22,400) |
| Less payment processing (2.9%) | (£11,206) |
| Less advertising spend | (£62,000) |
| Less salaries | (£45,000) |
| Less warehouse rent | (£12,000) |
| Less software and tools | (£4,500) |
| Operating Profit (EBITDA) | £74,734 (18.4%) |
| Less interest and tax (estimated) | (£18,000) |
| Net Profit | £56,734 (13.9%) |
This brand has strong economics: 60% gross margin, 18.4% EBITDA margin, 13.9% net margin. The P&L walkthrough makes clear that advertising (£62K = 15.2% of net revenue) is the largest single operating expense — and therefore the highest-leverage area for margin improvement.
Why Gross Profit Is Most Useful for Ad Decisions
When deciding how much to bid for a Google Shopping click, you need to know: how much gross profit does a successful sale from this click generate? Net profit is not useful for this calculation because:
- Net profit includes fixed cost allocations (rent, salaries) that don't change whether you make one more sale or one less
- These fixed costs are irrelevant to the marginal decision of whether to spend an extra £1 on advertising
- The relevant question is: "Will this sale generate more gross profit than I'm spending on advertising to get it?"
This is the contribution margin framework: at the margin, the only costs that matter are variable costs (COGS, fulfillment, payment fees, returns). Fixed costs have already been committed — they don't affect the per-sale advertising decision.
The Marginal Profit Rule
Any sale that generates more gross profit than the ad spend used to acquire it improves your overall profitability — even if net margin after overheads is zero for that specific sale. Fixed costs are sunk; only incremental contribution matters for advertising decisions.
What "Profitable Enough" Looks Like at Different Scales
There is no single answer to "what net margin should I target?" — it depends on stage, growth rate, and reinvestment needs. Some context:
| Revenue Scale | Typical Net Margin Target | Context |
|---|---|---|
| £500K–£2M/year | 5–12% | Heavy reinvestment phase; fixed costs large relative to revenue |
| £2M–£10M/year | 8–18% | Overheads diluting; scale benefits emerging |
| £10M–£50M/year | 12–22% | Strong operating leverage if gross margin is healthy |
| £50M+/year | 10–20% | Scale benefits offset by complexity and competition |
Net margins below 5% leave very little buffer for market disruptions, rising costs, or customer acquisition headwinds. Building to 10–15% net margin creates the financial resilience to invest through downturns and compete aggressively on acquisition when opportunities arise.
Frequently Asked Questions
What is gross profit?
Gross profit = Revenue − Cost of Goods Sold. It measures how much money is left after paying for the products sold, before any operating expenses (wages, rent, advertising). It's the first measure of product economics health.
What is net profit?
Net profit = Revenue − all expenses (COGS + operating expenses + taxes + interest). It's what the business actually keeps after every cost has been paid. Net profit is the bottom line, but it's a lagging indicator — less useful for real-time advertising decisions.
What is EBITDA and why does it matter for e-commerce?
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) measures operating profit without capital structure effects. It's useful for comparing business performance over time or with peers, and is the metric most often used in business valuations.
Why is gross profit more useful than net profit for advertising decisions?
Advertising decisions are made at the product or campaign level. Gross profit is attributable to specific products — it tells you how much margin is available to fund ad spend on that product. Net profit includes overhead allocations that can't be directly linked to individual products or campaigns.
What is a healthy net profit margin for e-commerce?
Strong e-commerce brands typically target 8–15% net profit margin. Fashion and beauty brands with high gross margins often achieve 10–20%. Electronics and commodity retailers with thin gross margins may achieve only 2–5%. Under 5% net margin leaves little buffer for market disruptions.
Next Steps
Understanding the difference between gross and net profit transforms how you evaluate advertising performance. The question is never just "what ROAS did we hit?" — it's "how much gross profit did each campaign contribute after all variable costs?"
See Real Gross Profit Per Campaign
GROW Your Sales connects your COGS data with live Google Ads performance, showing actual gross profit contribution by product and campaign — not just ROAS. Create an account to get started →
