What is gross profit?

Gross profit is your revenue minus the cost of goods sold (COGS), also known as the cost of revenue.

In SaaS, this includes expenses directly tied to delivering your product—like server costs, third-party services, or developer support tied to product maintenance.

It does not include overhead like rent, admin salaries, or marketing spend.

A quick test: if you stopped selling your product tomorrow, would the cost still exist? If the answer is yes, it likely belongs in overhead—not in your COGS.

<<Download the SaaS metrics cheat sheet.>>

How to calculate gross profit

Your gross profit, sometimes known as gross income, is calculated as sales revenue minus the cost of goods sold (COGS), also known as cost of sales.

For a SaaS business, sales revenue (or net sales) typically includes income from subscription fees and other add-on features. It doesn’t include money from non-business activities (like the sale of an asset) or from outside investment.

COGS, as mentioned above, includes the product- or service-related costs. For example, if you sell only digital products and services, your cost of goods sold will include costs of:

• Servers and cloud storage
• Hosting applications
• Software licenses and subscriptions

For companies that sell physical goods, COGS will also include raw material costs, labor costs, production costs, and other expenses to deduct from your company’s revenue.

When calculating gross profit, you don’t include overhead costs, interest expenses, or taxes.

What is net profit?

Net profit, or net income, measures your company’s actual profit vs revenue after accounting for all positive and negative cash flows.

Positive cash flows include your sales revenue plus additional income sources, such as investments or money earned from the sale of an asset. Negative cash flows are all of your expenses, such as the cost of goods sold, cost to serve, loan interest, tax provisions, and one-time fees or payments.

Net profit is also referred to as the bottom line since it’s the last line on a company’s income statement.

How to calculate net profit

To calculate net profit, you start with total revenue (also known as your top line), add all positive cash flow amounts, and subtract all negative cash flow amounts.

Here, total revenue includes all streams of revenue. You’d include both your revenue from sales and income from investments.

Similarly, total expenses account for all your company’s expenses — whether product-related or administrative and operating costs.

Gross profit vs. net profit

Your company’s gross profit considers your revenue and direct costs related to your product, while net profit measures how much money your business makes overall.

Here’s a look at the key differences when comparing gross profit vs. net profit.

What gross and net profit tell you about your business

Gross profit and net profit each tell a different story about your business’s financial health. Together, they help you understand both how efficiently your product generates revenue and how well you manage your overall costs.

Gross profit is useful for evaluating product performance. From this, you can calculate gross profit margin—the percentage of revenue that remains after covering the cost of delivering your product or service. This ratio is a go-to metric for comparing product efficiency against industry benchmarks.

In SaaS, gross profit margins typically range from 60–70 percent, according to data from NYU Stern School of Business. If your margin falls below 40 percent, it could be a signal to explore ways to reduce your product-related costs.

That said, early-stage SaaS companies often operate at a net loss due to significant upfront investments. In fact, a sample set of public SaaS companies—including Salesforce, Asana, and HubSpot—showed that 83 percent were unprofitable at IPO.

Still, a positive gross profit is a key early indicator that investors look for. It shows your product is generating value, even if you haven’t yet reached profitability. This concept aligns with the Rule of 40—which suggests a SaaS company’s combined growth rate and profit margin should exceed 40 percent.

Net profit shows whether your business is profitable overall. If you’re earning a strong gross profit but still operating at a loss, overhead costs could be the issue. Tracking net profit helps you understand where your income is going and whether you need to reduce expenses, secure additional funding, or reinvest for growth.

In short: gross profit shows product strength. Net profit reveals operational efficiency. Monitoring both gives you a more complete picture of financial performance—and what steps to take next.

What is operating profit?

Operating profit is another key measure of business performance. It reflects how much profit your company generates from core operations—before accounting for interest payments or income taxes. You may also hear it called earnings before interest and taxes (EBIT).

Operating profit excludes income from non-operating sources, like selling assets or earning interest, but does include expenses like depreciation, which reflects the decline in asset value over time.

Because businesses often carry debt, interest payments can reduce net profit significantly. By excluding those costs, operating profit offers a clearer picture of how your core business is actually performing.

For example, even if your company is carrying a high debt load, you might still have a positive operating profit—and a negative net profit. That distinction helps you see whether your business model is fundamentally sustainable, even if you’re still working toward full profitability.

It’s a valuable lens for evaluating performance and making better-informed decisions.

Key takeaways

• Gross profit measures your earnings after subtracting the cost of goods sold (COGS), focusing on the efficiency of production and sales processes
• Net profit considers all income and expenses, providing a comprehensive view of your company’s financial health
• Understanding both gross and net profit helps identify areas for improvement in product development and overall cost management
• Calculating gross profit involves subtracting COGS from total revenue, while net profit is determined by subtracting all expenses from total revenue
• Both metrics are essential for strategic decision-making, helping finance teams assess profitability and operational efficiency

Tips for monitoring and improving profit margins

Before you grow your net profit margins, you need to have a baseline of your current profits and a method for consistently measuring them.

Check finances frequently

When managing profit and loss, many businesses compile statements that include quarterly net and gross profits.

However, you should track your cash inflows and outflows every week at a minimum. This is the lifeline of your business — and by keeping an eye on your cash flow, you can see signs of a problem before it occurs and make the appropriate decisions.

Automate your monitoring

Manually creating financial reports like income statements, expense reports, and cash flow summaries can take up valuable time.

Strategic finance tools can help streamline the process by automatically generating the reports you need—accurately and on demand.

Automation doesn’t just save time. It gives you access to real-time data, reduces the risk of manual errors, and ensures your team can make confident, well-informed decisions based on up-to-date financial insights.

Track changes over time

Each financial report offers a snapshot—but the real insights come from tracking trends over time. Comparing profit data across periods helps you spot early signs of change and uncover what’s driving them.

For example, fluctuating profit margins might signal operational inefficiencies, while a steady decline could point to increased competition or weak product differentiation.

These trends don’t always reveal the full story on their own—but they’re a crucial starting point. Monitoring profit over time gives you the perspective you need to dig deeper and make informed, proactive decisions.

Get the 10 SaaS metrics you didn’t know you needed

Simple gross profit vs. net profit calculations are just the starting point

It’s not enough to understand whether you are making a profit or not. Analyzing your profit across different stages of your operations helps you pinpoint what is and isn’t working in your business to help make informed decisions.

Your gross profit describes the money you make after expenses on your products. Understanding this number tells you how efficiently your company uses labor and supplies. On the other hand, your net profit considers all business expenses to serve as a broader indicator of your overall financial reporting.

Gross profit vs. net profit FAQs

What is the difference between gross vs. net profit?

Gross profit takes all income and total cost of goods sold/revenue into account, while net profit measures all income and expenses of a business. That means gross profit is used to evaluate the profitability of product development, while net profit measures the profitability of the company.

What is an example of gross profit?

As an example of gross profit, let‘s say your company revenue for April is $100,000. Your cost of goods sold (COGS) is $40,000. Your gross profit would be $60,000 (total sales revenue – COGS), which is a 60 percent margin. This gross profit calculation does not take administrative expenses or operating expenses, such as rent or insurance into account.

What is an example of net profit?

Expanding on the example above, let’s say a small business has a gross profit of $60,000 over a given period of time. That company’s expenses and taxes for the same time period equal $20,000. $60,000 – $20,000 = $40,000, so the company’s net profit would be $40,000.

Is gross profit higher than net profit?

Gross profit should be higher than net profit because gross profit is the total amount of money you make before expenses, while net profit = gross profit – expenses.