It's easy to get excited about revenue. Seeing that big "Total Sales" number grow feels great, but it's a vanity metric. It doesn't tell you anything about the health of your business. The true measure of health is **profitability**.
The two most important numbers to understand this are **Gross Profit** and **Profit Margin**. And luckily, they're very easy to calculate.
Step 1: Find Your Cost of Goods Sold (COGS)
First, you need to know what it costs you to make your product.
- For products: This is your raw materials, manufacturing costs, and packaging.
- For services: This is the cost of your time (your hourly rate) or any software subscriptions you *need* to deliver that service.
Let's say you sell handmade goods. Your materials cost $30 and your labor is $20. Your **Cost is $50**.
Step 2: Calculate Gross Profit
This is the simplest, most fundamental calculation. It's how much money you make on a single sale, *before* other expenses like rent or marketing.
Selling Price - Cost = Gross Profit
Using our example: If you sell your product for **$100**, your equation is:
$100 (Selling Price) - $50 (Cost) = $50 (Gross Profit)
You made $50. That's your Gross Profit.
Step 3: Calculate Profit Margin
This is the most important one. It's a percentage that tells you how *efficient* your business is. It answers the question: "For every dollar I sell, how many cents do I keep as profit?"
(Gross Profit / Selling Price) * 100 = Profit Margin %
Using our example:
($50 Gross Profit / $100 Selling Price) * 100 = 50%
Your Profit Margin is **50%**. This is a very healthy margin.
How to Use This
Now you can make smart decisions. If a competitor sells a similar product for $80, you can instantly see if you can compete.
($80 Selling Price - $50 Cost) / $80 Selling Price = 37.5% Margin
You can also work backward. What if you *need* a 40% margin to be profitable? Use our Profit Margin Calculator in "Reverse Mode" to find the perfect price.