🫀Anatomy of Business: Gross Profit & Gross Margin Explained

Gross Profit and Gross Margin are same same, but different. Both are expressions of profit. One a % the other an absolute.

One of the biggest use cases for media buyers and gross margin is identifying products worthy of paid media.

Hint: High margin ones ;)

However, let’s take a step back and understand what gross margin is and how to calculate it for a few products.

But first…a story.

Ok, you have Wally the Whale and he sells whale widgets. Wally is a great business man and has all his fish in row when it comes to his business operations. He recently hired Polly the Porpoise (big brain move Wally) to launch his online operations.

Polly is ready to setup his Shopify store and Triple Whale. However, she needs a few key pieces of info. Starting out, she needs to know the COGS or cost of goods sold for every SKU (stock keeping unit).

Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good. It excludes indirect expenses, such as distribution costs and sales force costs. - Link

Wally sells three types widgets and the COGS/Prices for each are below:

Beluga - Price $10 & COGS $3

Humpback - Price $20 & COGS $10

Orca (yes I know they aren’t real whales) - Price $100 & COGS $25

Gross margin is net sales less the cost of goods sold (COGS). In other words, it’s the amount of money a company retains after incurring the direct costs associated with producing the goods it sells and the services it provides. - Link

Now, let’s do some math and calculate the gross margin of each product.

Beluga GM % = ($10 - $3)/$10 = ($7 /$10)100 = 70%

Humpback GM % = ($20 - $10)/$20 = ($10 /$20)*100 = 50%

Orca GM % = ($100 - $25)/$100 = ($75/$100)*100= 75%

Fantastic! After inputting the COGS, Polly will finish up by adding the payment gateway costs for Wally’s Whale Widget Store.

Now she knows the gross margin per product. Major 🔑.

In this example, Polly would build campaigns around the Beluga & Humpback, barring an anomalous LTV data. The economics are just way betterz.

Sweet, now let’s learn how to calculate Gross Profit using her first week of sales.

Side note: Don’t know how to calculate your COGS, just ping us on the Twitters @TryTripleWhale or read this.

*Side Note: To calculate Gross Margin % for the store you would take Gross Profit/Net Sales*100.

🔬 Calculate Gross Profit

Ok, Polly has just finished inputting the last of the COGS and she is ready to start slanging whale widgets.

She fires up the FB Ads, hires Chase Dimond to run her email and off she goes.

In week 1, she generates $1000 in net sales and she sells:

• 10 Belugas -> $100 in Revs
• 20 Humpbacks -> $400 in Revs
• 5 Orcas -> $500 in Revs

Now let’s calculate the Gross Profit for week 1. Seeing Gross Profit is all that is left over after the sale, let’s see how we get there.

Time to land the plane. We just need the shipping and handling fees.

To understand why, let’s break down a Shopify Transaction.

A Shopify Transaction has the following items:

Net Sales = Gross Sales - Returns - Discounts - Gift Cards + Shipping

We do not include taxes, as this is a liability and not considered revenue.

An easy way to think about it is, how much money did the customer give me? That amount would be the Net Sales.

In the below order, the net sales recorded would be $101.42.

Now calculate Gross Profit using the following formula:

Gross Profit = Net Sales - COGS - Shipping Cost - Handling Cost - Taxes - Transaction Fees

Perf. Now, Polly asks Wally for the shipping and handling costs for week 1. She uploads those into Triple Whale & just like that, Gross Profit is calculated.

Great work Polly!

** Side note: Triple Whale pulls in everything besides shipping & handling fees.

** Side Note: If you have ShipStation, we pull in all the shipping & handling fees.

**Side Note: Shipping & Handling (you to customer) is kinda of weird because it SHOULD NOT be included in COGS, but SHOULD be included in Gross Profit. A lot of accountants will just include this in another section called Cost of Sales. Super nerdy stuff that you really don’t need to know, but just for all the curious kitties.

**Side Note: Shipping from the manufacturer to you is considered “freight” and SHOULD be included in the COGS.

P.S. I think we just set a new record for side notes.

📊 How to Track Gross Profit

Fortunately, you don’t have to do much outside of:

Add your COGS (if they are in Shopify we import them)

Add Payment Gateway Costs (one time thing)

Import Ship & Handling Fees (or connect Shipstation).

After that, everything will be calculated automagically in Triple Whale. We even take it a step further and calculate Profit on Ad Spend (POAS); which is POAS = Gross Profit/Total Ad Spend.

POAS is part of our 3 ROAS to Rule Them All.

Furthermore, if you are living in the future and using the Triple Pixel; you can actually see Gross Profit at the campaign, ad set and ad level. Pretty bananas! #WhatATimeToBeAlive

**Side note: We don’t explicit provide Gross Margin or Gross Profit by default (outside of POAS), but you can calculate this using our Custom Metric Builder.

**Side note: We do provide Gross Profit on the Products Screenand Shopify provides both on their product screen.

⏳ Closing

Well, you made it! Congrats on conquering the first of the three profits. There is still Operating Profit & Net Profit, but we’ll save those for another Whale Mail.

Understanding the fundamentals of the business is impossible to do without understanding Gross Profit and Gross Margin.

Now you not only understand the basic concepts, but can calculate Gross Margin and Gross Profit! All from a free newsletter!?

I don’t think people are ready for the caliber of marketers we are building over here at Whale Mail. #LetsGo