Go with your gut, trust your instincts. Right? Wrong! When it comes to making business decisions it’s simply not enough to rely on good old-fashioned intuition. Not when we have the means and technology to gather, analyze and interpret the story that solid data is telling us. Luckily, we no longer have to be data scientists to crunch the numbers and understand what this information is telling us, to work out what steps to take to improve our profitability, because that’s ultimately what you’re in the for-profit business for – to make profits!
The net profit/gross profit debate for data-based decisions
Data-based decision-making is more than just a trend, it’s the most sensible way to choose the right path for your business, for everything from which marketing channels to use to what products to sell more of. Online store owners are in a particularly good position when it comes to using data to make decisions:
- E-commerce platforms such as Shopify provide e-commerce analytics, such as order data, directly through the platform or from one of the many apps that be downloaded from the Shopify app store.
- Shipping carriers store data in-store shipping profiles including shipping rates and costs, preferred delivery speeds, and so on.
- Google Analytics – the most popular analytics tool which gives access to data reports on many base metrics such as site traffic and more advanced, actionable customer behavior metrics through Enhanced Analytics. There’s also the option to integrate Google Analytics into your Shopify store account.
- Online marketing platforms also provide data insights about your target market, specific campaign performance, return on advertising spend (ROAS), and more.
- Payment processors can provide data about financial performance
All this data feeds into the crux of decision-making – calculating profitability. And that’s where a Shopify profit calculator comes in handy, as profit calculation isn’t as straightforward as Revenue – Expenses. There’s a lot more to consider, particularly when it comes to the net profit vs gross profit debate, and which you should use to base your business decision-making on, or perhaps it’s both?
It’s so important to constantly calculate, measure and monitor gross and net profit, and above all else – to do it correctly. There’s no margin (pun intended) for error when it comes to calculating profit margin for your Shopify store – one slip-up could land your profits on a downward spiral.
You need to keep your eye on two prizes – gross profit and net profit. Although one feeds into the other, you need to know what each of these two metrics is, how to calculate them, how they impact your business, and what actions you can take to improve them.
BeProfit – Profit Tracker collects and analyzes all the metrics that affect a Shopify store’s profitability, calculates profits in real-time using this data, and providing intuitive reports that a store owner can actually use to make decisions and take action to improve their store’s profitability.
Gross profit or net profit calculation for your Shopify store?
Gross profit is the amount of money you have made after you deduct all the costs relating to the sale of your products (such as the cost of goods (COGs), including marketing and sales expenses) from your revenue (or net sales which is sales less returns and discounts). Gross profit calculation doesn’t include any fixed business expenses.
Unlike gross profit, net profit includes all other expenses and gives a far more comprehensive picture of profitability, and can be calculated by deducting fixed costs from gross profit.
Once gross profit has been calculated, net profit margin takes all remaining expenses into account including:
- Overheads e.g. rent, utilities
- Debt repayments
- Other fixed costs
Importance of calculating gross profit margin for your Shopify store
Gross profit margin takes all variable costs into account that are incurred directly in the sale and marketing of products and excludes overheads and fixed business expenses.
Because gross profit margin takes all cost of goods sold into account, it’s the best way to measure performance on a per-product or per-order basis and to help you make business decisions such as:
- Whether to negotiate prices with product suppliers or look for alternative suppliers
- Whether you should look for lower-cost shipping providers or negotiate with existing shipping carriers
- Which products are the most profitable so you can invest in those products – increase supply and increase marketing/sales efforts for those products
- Which marketing channels have the best ROI so you can focus on those – for example, if you use Facebook, Instagram and Pinterest ads to market your products, you can analyze performance data from each of these platforms to assess which work best, which bring in the most customers/revenue versus the cost of advertising and focus on the top-ROI channels.
By calculating gross profit margin, you can assess how your business is doing and how much money you’ll have left to support the business. Obviously, the higher your gross profit margin, the better your cash flow. If you have a tight gross margin, you’ll be more likely to run into cash flow problems once you’ve paid off all your fixed costs.
Sound daunting to collect all this information? With BeProfit – Profit Tracker, you can automatically sync your Shopify account, your marketing ad platforms, shipping profiles and payment processor information to the BeProfit app in just a few clicks.
All your real-time data gets pulled into the app for analysis and is presented intuitively in one dashboard through user-friendly graphs and reports. Thanks to this integration, all the data is updated in real-time so you constantly are seeing live profitability reports.
Importance of calculating net profit margin for your Shopify store
While calculating gross profit margin is crucial for making operational business decisions, net profit margin is essential for management-level decision making and for investors to see how the business is performing.
The actual calculation of net profit is simple, but gathering all the input, the data, is what gets most online store owners in a tizzy.
This is where a Shopify profit calculator like BeProfit – Profit Tracker comes in handy. If you run your store through Shopify, you can download the BeProfit app directly from the Shopify app store. In the dashboard, you can include overhead costs and all other expenses necessary to calculate net profit margin in addition to gross profit margin.
It’s all very well to have a high gross profit margin but if you have unreasonably high overheads, for example if your office space rent is high when you have the option for a home office, those unnecessary costs will eat into your net profit, possibly causing negative cash flow – and could be the ultimate demise of your business.
J.C. Penney is a good case study illustrating the importance of calculating, analyzing and interpreting the full story that both gross profit and net profit is telling you, to give you a full picture of your business’s health and profitability. While this is a massive retailer, the same best practices apply to even the smallest retailer.
J.C. Penney was one of the many retailers hit hard by the recession although the company reported gross profit of $540 million, they also had a net loss of -$398 million, due mainly to expenses such as interest on debt. So while the company appeared to be performing well if you just take gross profit into account, the net loss demonstrates that J.C. Penney is actually in financial dire straits.
Net profit + gross profit for true data-based decision-making
For e-commerce store owners, it’s not a case of net profit versus gross profit calculation. The solution in fact is to take both into account, an equal and complementary relationship that can help your store on two levels – to make day-to-day decisions and to make management-level decisions; all with one main objective in mind – to improve your Shopify store’s profitability. Accurate profit calculation of both gross and net profit can make this objective a reality.