Gross profit is the revenue a business retains after subtracting the direct costs of producing the goods it sells (COGS).
Why Gross Profit Matters
Gross profit is the clearest indicator of how much value the business creates before overheads. It helps teams understand:
- How profitable the product model is before marketing, operations, or overhead
- How pricing and cost decisions interact
- Which categories or products drive the most contribution
- How much room exists for investment in growth, marketing, or innovation
- How resilient the business is to cost or demand shifts
Healthy gross profit gives a business the breathing room to operate confidently.
How Gross Profit Works
Gross profit is typically calculated as:
Gross Profit = (Revenue−COGS)
Key drivers include:
- Retail price
- Discounting and markdowns
- Cost of goods sold
- Channel mix (wholesale vs DTC)
- Product mix (high vs low margin items)
Example: If a product sells for £100 and costs £40 to produce, the gross profit is £60.
Common Use Cases
- Margin management: understanding profitability at SKU, category, or channel level
- Pricing strategy: setting prices that protect contribution
- Range planning: balancing high and low margin products
- Forecasting: modelling revenue and profit scenarios
- Markdown planning: understanding the impact of discounting
- Investment decisions: determining how much can be reinvested
Related Terms
What Gross Profit Really Tells Us
Gross profit is often treated as a simple subtraction, revenue minus cost, but it’s actually a pulse check on the health of the entire commercial engine. It shows whether the value customers see in the product is strong enough to rise above the cost of making it.
Rising gross profit can signal momentum: sharper pricing, stronger brand equity, or a product mix that’s resonating. Falling gross profit can signal pressure: rising costs, heavier discounting, or a shift in customer behaviour that the business hasn’t yet adapted to.
What makes gross profit especially revealing is how quickly it responds to change. It reacts to supply chain volatility, competitive pricing, assortment decisions, and even storytelling. It’s one of the few metrics that captures both the economics of the product and the perception of the customer.
At its core, gross profit is a measure of value creation. It shows how effectively the business turns materials, labour, creativity, and risk into something customers are willing to pay for. When teams read gross profit not just as a financial outcome but as a reflection of how well the product resonates in the real world, they gain a clearer sense of where the business is strong, where it’s stretched, and where the next opportunity lies.
