Gross profit and net profit are two of the most important — and most confused — concepts in ecommerce. Mixing them up leads to serious pricing mistakes, overestimated business value, and decisions made on inaccurate financial data. This guide explains both clearly, with real examples across Etsy, Shopify, and Amazon FBA.

One sentence each
Gross profit = Revenue minus what you paid for the product. Net profit = Revenue minus everything you spent to make and sell the product. Net profit is what actually goes in your pocket.

What is Gross Profit?

Gross profit answers one question: how much is left after paying for the product itself?

Gross Profit = Revenue − Cost of Goods Sold (COGS)
Gross Margin % = (Gross Profit ÷ Revenue) × 100

COGS includes only the direct costs of producing or purchasing what you sold:

  • Manufacturing cost (if you make it)
  • Wholesale/supplier price (if you resell it)
  • Raw materials (for handmade products)
  • Direct labor (if you have employees making products)

COGS does NOT include: platform fees, shipping, marketing, packaging, subscriptions, or any operating expenses.

Gross Profit Example

You sell a custom phone case on Etsy for $28. The blank case costs $3.50 and printing materials cost $1.50. Total COGS = $5.00.

Gross Profit = $28 − $5 = $23 | Gross Margin = $23 ÷ $28 × 100 = 82%

82% sounds incredible. But it's not the number that matters for running your business.

What is Net Profit?

Net profit is your actual take-home profit after accounting for every cost involved in running the business and making the sale.

Net Profit = Revenue − COGS − Platform Fees − Shipping − Marketing − Subscriptions
Net Margin % = (Net Profit ÷ Revenue) × 100

Net Profit Example (same phone case)

  • Revenue: $28.00
  • COGS (case + materials): $5.00
  • Etsy transaction fee (6.5%): $1.82
  • Payment processing (3% + $0.25): $1.09
  • Shipping (envelope + postage): $4.50
  • Packaging (tissue paper, sticker): $0.40
  • Listing fee (allocated): $0.20
  • Etsy Ads (per sale): $1.50
  • Total Costs: $14.51 | Net Profit: $13.49 | Net Margin: 48.2%
From Revenue to Net Profit — $28 Etsy Phone Case
How each cost reduces your gross profit to net profit

Gross margin was 82%. Net margin is 48.2%. Still good — but notice how different the two numbers are. If you were making business decisions based on gross margin, you'd dramatically overestimate profitability.

Real-world gap
The average gap between gross margin and net margin for ecommerce sellers is 20–40 percentage points. A product with 70% gross margin often delivers 30–40% net margin after all costs.

Why the Gap Between Gross and Net Matters

Gross vs Net Margin — Three Platforms
The gap varies significantly by platform due to different fee structures

Etsy: Fees are moderate (6.5% transaction + ~3% processing + shipping). The gap between gross and net is often 25–35 percentage points.

Amazon FBA: Fees are heavy (15% referral + FBA fulfillment + PPC). The gap can be 35–50 percentage points. A product with 65% gross margin might only deliver 20% net margin on Amazon.

Shopify: Platform fees are low (~3% processing), but self-generated traffic costs can create a 30–40 point gap. Established stores with high email revenue have smaller gaps.

The Costly Mistakes That Come From Confusing These Numbers

Mistake 1: Pricing based on gross margin

A seller calculates 70% gross margin and thinks they're very profitable. They price aggressively to win sales. Then they're confused why their bank account isn't growing despite strong sales. Net margin is 15% — barely covering their own time.

Mistake 2: Evaluating products by gross margin alone

Product A has 75% gross margin but sells on Amazon (heavy fees + PPC). Product B has 55% gross margin but sells on Etsy (lower fees, no mandatory ads). Product B likely has a higher net margin despite lower gross margin.

Mistake 3: Setting growth targets on gross revenue

Celebrating $100K in revenue while ignoring that net profit is $8,000 (8% margin) is a trap. True business growth is measured in net profit, not top-line revenue.

Mistake 4: Forgetting COGS includes more than just the product price

For Amazon FBA sellers, COGS should include the cost to ship inventory to Amazon's warehouse. For handmade sellers, it should include the fair market value of their time. Underestimating COGS overstates gross margin.

When to Use Each Metric

Use gross margin for: comparing product profitability within the same platform, quick product viability screening, evaluating supplier quotes.

Use net margin for: understanding true business profitability, pricing decisions, comparing performance across platforms, tax planning, deciding whether to scale or pivot.

How to Track Both Correctly

  1. Record every sale — platform, product, selling price
  2. Record COGS per unit — what you paid for the product or materials
  3. Pull platform fee reports monthly — every major platform provides a fee breakdown in your seller dashboard
  4. Track marketing spend separately — keep a simple spreadsheet of weekly ad spend
  5. Calculate net margin monthly — Revenue − COGS − Fees − Marketing = Net Profit ÷ Revenue

Calculate your net profit right now

Our free calculator gives you net profit, margin %, and break-even price — with all platform fees included.

Use the Free Calculator →

Summary

Gross profit subtracts only COGS from revenue. Net profit subtracts all costs — fees, shipping, marketing, and operating expenses. The gap between the two is typically 20–50 percentage points for ecommerce sellers. Always make pricing and business decisions based on net margin. Use our free calculator to get your net margin in seconds — it automatically accounts for platform fees so you get the real number, not the misleading one.