Gross Profit – Definition & Meaning

Gross profit is the amount a company earns from sales after subtracting the direct costs of producing and delivering its goods or services (cost of revenue/COGS). It’s the foundation for understanding margins and operating efficiency.

Key Takeaways

• In one sentence: Gross profit = sales minus the direct costs to generate those sales.
• Why it matters: It’s the starting point for profitability analysis and gross margin trends.
• Context/usage: Appears near the top of the income statement, right below revenue and cost of revenue.
• Related metric: Gross margin expresses gross profit as a percentage of revenue.

What Is Gross Profit?

Gross profit captures the value created by a company’s core operations before overheads like sales, general and administrative (SG&A), R&D, interest, and taxes. By stripping out only the direct costs of revenue, it isolates production and delivery efficiency, which is crucial for pricing, product mix, and scaling decisions.

How Gross Profit Works

At its simplest:

Gross Profit = Revenue – Cost of Revenue

• Revenue is the top-line sales figure.
• Cost of revenue (COGS) includes direct costs such as materials, direct labor, manufacturing overhead tied to units made, or- for services/SaaS- hosting, support, and third-party fees attributable to delivering the service.

Example Calculation

• Revenue: $1,000,000
• Cost of Revenue: $620,000
• Gross Profit: $1,000,000 – $620,000 = $380,000
• Gross Margin: $380,000 ÷ $1,000,000 = 38%

Benefits and Considerations

• Benefits
  • Clarity on core economics: Highlights unit economics and pricing power.
  • Comparability: Enables peer comparison within an industry via gross margin.
  • Early warning: Deteriorating gross profit can flag input cost inflation or discounting.
• Considerations
  • Classification differences: What counts as “cost of revenue” can vary by industry (e.g., fulfillment for e-commerce, hosting for SaaS).
  • Product mix effects: Shifts toward lower- or higher-margin products/services change gross profit even if revenue grows.
  • Scale & learning curves: Efficiency gains can lift gross profit over time as volumes rise.

Example of Gross Profit in Practice

A retailer launches a premium line with higher markup. Even if unit sales are flat, the mix shift toward premium items can increase gross profit and gross margin. Conversely, promotional discounting to clear inventory may raise revenue volume but compress gross profit due to lower price per unit.

Related Terms

• Revenue – total sales before expenses.
• Cost of Revenue (COGS) – direct costs tied to producing/delivering sales.
• Gross Margin – (Revenue – Cost of Revenue) ÷ Revenue.
• Operating Income – profit after SG&A and other operating costs.