On This Page
- What gross profit measures
- Two inputs, one optional target
- One formula, three ways to read it
- Working backward from a target margin
- How the numbers are checked
- What belongs in COGS
- Is your margin good?
- FAQ
What Gross Profit Measures
Gross profit is revenue minus the direct cost of what you sold. A shop that buys a jacket for $40 and sells it for $100 makes $60 of gross profit. Rent, staff wages and card fees still have to come out of that $60, so gross profit is not what the owner keeps. It answers a narrower question: does the buying and selling itself make money before overhead?
It is the first subtotal on an income statement. Operating profit subtracts operating expenses from it, and net profit then subtracts interest and tax. A business can post a 60% gross margin and still lose money if its overhead is bloated, which is why the Profit Margin Calculator tracks all three levels from one revenue figure.
Two Inputs, One Optional Target
Enter revenue (total sales before deductions) and COGS, and the results appear as you type: gross profit in dollars, gross margin as a percentage, the same margin as a decimal ratio, and COGS as a share of revenue. If your sales figures come from a point-of-sale system that includes tax, strip it out first with the Reverse Sales Tax Calculator, or your margin will look better than it is.
The optional target margin field runs the math in reverse. It shows the most you can spend on COGS at your current revenue, and the least revenue you need at your current COGS, to hit that margin.
One Formula, Three Ways to Read It
All three come from the same subtraction. Using $150,000 of revenue and $90,000 of COGS:
| Measure | Formula | Result |
|---|---|---|
| Gross profit | Revenue − COGS | $60,000 |
| Gross margin | Gross profit ÷ revenue × 100 | 40% |
| Gross profit ratio | Gross profit ÷ revenue | 0.40 |
Margin and ratio are the same number in two formats. You will also see "gross profit percentage" and "gross profit rate"; they are the same calculation under other names.
Working Backward From a Target Margin
Required Revenue = COGS ÷ (1 − Target Margin ÷ 100)
Cost ceiling: a manufacturer projecting $200,000 of revenue wants a 50% gross margin. $200,000 × 0.50 = $100,000 is the most production can cost. If quotes come in at $115,000, prices, materials or supplier terms have to change.
Price floor: a contractor with $75,000 of materials and subcontractor costs wants 35%. $75,000 ÷ 0.65 = $115,385 is the lowest quote that still hits it. For translating that margin into the markup percentage many trades quote in, use the Markup Calculator.
How the Numbers Are Checked
Gross profit is computed as revenue minus cost of goods sold, full stop. No operating expenses, interest, or tax figures enter that subtraction anywhere in the code, which is why the result here will not match a net profit figure for the same business. When you also enter a target margin, the calculator solves two related but separate equations: revenue times (1 minus target margin) gives the maximum COGS that would hit that margin, while COGS divided by (1 minus target margin) gives the revenue needed to hit it at your current cost.
What Belongs in COGS
Most wrong gross margins come from putting the wrong costs into COGS. The test is whether the cost rises and falls with what you produce or sell.
- In COGS: raw materials, inventory purchases, factory labor, production overhead such as factory rent and equipment depreciation, and shipping included in the sale price.
- Not in COGS: office rent, sales and admin salaries, marketing, accounting and legal fees. These are operating expenses and sit below the gross profit line.
Service businesses often call it "cost of revenue": the contractors, delivery labor and materials used on client work. How you value inventory matters too. When prices are rising, FIFO expenses the older, cheaper stock first and reports a higher gross profit than LIFO does. In a spreadsheet with revenue in B2 and COGS in B3, gross profit is =B2-B3 and gross margin is =(B2-B3)/B2 formatted as a percentage.
Is Your Margin Good? Industry Ranges
Only against businesses like yours. Typical gross margins:
| Industry | Typical gross margin | Why |
|---|---|---|
| Software and SaaS | 60–80% | Serving one more customer costs almost nothing |
| Professional services | 50–70% | Billing rates set well above labor cost |
| Retail apparel | 40–60% | Big markups, eroded by discounts and returns |
| Manufacturing | 25–40% | Materials and factory labor are heavy |
| Grocery | 20–30% | Thin margins, fast turnover |
| Construction | 15–25% | Materials and subcontractors dominate |
Three businesses run through the same formula show why. A boutique with $45,000 of monthly sales and $27,000 of stock costs keeps $18,000, a 40% margin. A SaaS company with $800,000 of revenue and $160,000 of hosting and support keeps $640,000, 80%. A restaurant taking $30,000 a week against $10,500 of food and drink keeps $19,500, 65%, which looks strong until labor and rent take most of it. To see whether that margin covers your fixed costs at your sales volume, the Break-Even Point Calculator is the next step, and the ROI Calculator shows whether the money invested to earn it is paying back.
Frequently Asked Questions
How do you calculate gross profit?
Subtract COGS from revenue: Gross Profit = Revenue − COGS. If revenue is $200,000 and COGS is $120,000, gross profit is $80,000. To express it as a percentage (gross margin), divide gross profit by revenue and multiply by 100: ($80,000 ÷ $200,000) × 100 = 40%.
How is gross profit calculated from an income statement?
Find "Net Revenue" (or "Net Sales") and "Cost of Goods Sold" (or "Cost of Sales" or "Cost of Revenue") on the income statement. Subtract COGS from Net Revenue. The result is labeled "Gross Profit" or "Gross Margin" on most formatted income statements. It appears as the first subtotal, before operating expenses.
What is the difference between gross profit and net profit?
Gross profit is revenue minus COGS only. Net profit deducts everything else: operating expenses (rent, salaries, marketing, utilities), depreciation, interest on debt, and income taxes. A business can have high gross profit and still report a net loss if its operating expenses are very high. Gross profit measures product economics; net profit measures overall business performance.
How do you calculate gross profit using FIFO?
Under FIFO (first in, first out), the oldest inventory costs are assigned to COGS first. If you bought 100 units at $10 in January and 100 units at $12 in February, then sold 100 units in March, COGS under FIFO is $10 × 100 = $1,000 (the January batch). This typically produces higher gross profit during periods of rising costs compared to LIFO, because older, cheaper inventory is expensed first.
How do you calculate gross profit for a service business?
Replace COGS with "Cost of Revenue" or "Direct Service Costs": the labor, contractor fees, and materials directly tied to delivering the service. For a consulting firm, this is the billable hours of the consultants delivering the project, not salaries of sales or admin staff. Gross profit = Total Service Revenue − Direct Service Delivery Costs. The margin calculation is identical to a product business.
References
- Investopedia: Gross Profit: Definition, formula, and examples of gross profit and gross profit margin with industry context.
- AccountingTools: What Is Gross Profit?: Accounting-focused explanation covering COGS composition, income statement placement, and gross profit analysis.
- Corporate Finance Institute: Gross Profit: Financial analysis perspective on gross profit margins, industry benchmarks, and their use in valuation.