Revenue vs. profit

Revenue represents the total income from sales, while profit is the remaining income after all expenses are deducted.

The difference between profit vs. revenue

Revenue is the money a business earns by selling a product or service, and profit is the money your business keeps after accounting for all the expenses involved in generating that revenue.

Here’s an example: suppose your SaaS business’s revenue is $50,000 but you spend $40,000 on marketing, the profit from that revenue is $10,000.

<<<Download the SaaS metrics cheat sheet>>.

You need to have a read on your business’s financial health to make informed business decisions.

Revenue and profit are the two most important metrics to get that valuable insight into your business’s financial health. These metrics help you understand your financial statements, manage your cash flows, and prepare budgets for the next month, quarter, and year.

Read on to understand the difference in revenue vs profit, how to calculate both, and how you can increase them to improve your financial performance.

What is revenue?

Revenue (also called the topline) is the money your business earns from core operations—like selling products or providing services.

It’s often called the top line because it’s the first number on your income statement. Revenue doesn’t include income from things like rent on company property or interest on savings—only what you earn from day-to-day business.

You might also hear it called net sales or net revenue. That’s because you subtract things like discounts, credits, and refunds from your total sales to get to your actual revenue.

For a SaaS company, revenue includes everything customers pay—monthly or annually—to use the software.

Understanding your revenue helps you track incoming cash flow, build budgets, and forecast your revenue run rate. It’s a starting point for shaping financial plans and projecting future growth.

Annual recurring revenue (ARR)

If your business runs on long-term subscription contracts, you might also track annual recurring revenue (ARR)—the total revenue you expect from active contracts over a 12-month period.

ARR helps you gauge product-market fit, assess momentum, and benchmark your business against others in your space.

For example, in 2020, the median growth rate for SaaS companies with less than $1 million in ARR was 47% in 2020—down from 68% before the pandemic.

Are you growing faster or slower than that? And what does your growth path look like in the months ahead?

What is profit?

Profit is what’s left after your business covers all its expenses. That includes things like operating costs, taxes, and depreciation—when assets lose value over time.

Unlike revenue, profit also reflects income from outside your core business, such as rental or interest income.

To truly understand your company’s financial health, it’s important to look at profit from different angles. That’s why businesses use multiple types of profit—each one showing how earnings and expenses stack up at different stages.

Here are the most important types of profits you should be familiar with:

1. Gross profit

Gross profit is what you get when you subtract the cost of goods sold (COGS) from your revenue. COGS includes the direct costs of delivering your product or service—like server expenses or third-party subscription fees for a SaaS company.

You can also look at gross profit as a margin: gross profit margin shows how much of your revenue remains after covering those direct costs. It’s a useful way to measure profitability and compare your performance to similar businesses.

In SaaS, there are two types of gross profit margins: subscription gross margin and total gross margin. Subscription gross margin excludes customer support costs, so you can focus on the profitability of your core offering.

On the other hand, the total gross margin accounts for customer support expenses.

In 2021, KeyBanc surveyed senior executives of 350 SaaS companies with median recurring revenue of $8.5 million (in 2020) and found the median subscription margin to be 80% and total gross margin to be 73%.

To gauge your company’s profitability, you can benchmark the subscription and total gross margins with these numbers.

Software Equity Group recommends that healthy, privately-held SaaS businesses have a total gross margin of over 70%, but there are exceptions. For instance, if you’re a SaaS startup and providing frequent discounts, your gross margins may be lower than average for the first couple of months.

2. Operating profit

Operating expenses are the everyday costs of running your business—like rent, salaries, marketing, and utilities. When you subtract those from your gross profit, you get operating profit (also called net operating income).

Operating profit reflects only the cash flow from your core business. It excludes taxes, interest payments, or one-time income like asset sales. That makes it a strong indicator of how your business is really performing.

Let’s say your SaaS startup carries some debt that’s reducing your overall profit. If you’re still seeing positive operating profit, it’s a sign your core business model is sound—and you’re heading in the right direction.

3. Net profit

Net profit is your company’s true bottom line—what’s left after you’ve accounted for every income source and expense. That includes taxes, loan interest, one-time costs, and income from non-core activities like selling assets or investments.

It’s called the “bottom line” because it appears at the end of your income statement—and gives you a full picture of profitability.

For many VC-backed SaaS companies, early-stage net losses are common due to heavy upfront investments. But that’s not necessarily a red flag. If your total gross profit margin is healthy, it’s a good signal that your business fundamentals are strong.

Is revenue or profit more important?

Profit matters—especially when you’re aiming to deliver returns. For example, if your SaaS product brings in $100 million in ARR but isn’t profitable, you’ll eventually need to find a path to positive net income.

But it’s not about choosing between revenue or profit. You need to track both to get a full view of your company’s financial performance.

Revenue helps you measure growth—specifically, how many subscriptions you’ve sold over a given time. Steady growth is a good sign. But it’s just the starting point.

Ask yourself:

• Did you have to spend heavily to drive that growth?
• Did you offer deep discounts—and what was the cost?
• Did a marketing push boost signups?

The answers show up in your expenses and ultimately impact your net profit. If profit rises alongside revenue, that growth is sustainable.

Bottom line: Revenue shows how fast you’re growing. Profit shows how efficiently you’re growing. Together, they give you a more complete picture of business health.

How to increase revenue and profit

Improving top-line and bottom-line growth largely depends on having an excellent product, but having the product noticed by the right audience can fuel growth too.

Let’s talk about what you can do to increase revenue and profit.

Increasing the company’s revenue boils down to selling more. You can do so by running effective marketing campaigns, upselling your product to increase the average revenue per user (ARPU), and improving retention rates.

An increase in total revenue typically, though not always, results in an increase in profit. You can also increase profit by adding non-operating revenue by renting out a building owned by your company.

Besides that, you can increase the profitability from sales revenue by reducing costs or increasing the price. You can reduce costs for your SaaS business by finding discounted deals or getting flexible plans for server space.

On the other hand, increasing the price can backfire since the market controls the price, and the price hike may impact the demand. However, you can opt for a flexible cost structure to cater to most customers.

You can also reduce total expenses by adjusting your operating leverage, increasing productivity, and using automation.

Key takeaways

• Revenue and profit are distinct but vital financial metrics: Revenue represents the total income from sales, while profit is the remaining income after all expenses are deducted. Both metrics are essential for understanding a business’s financial health and performance.
• Revenue is crucial for growth insights: By tracking revenue, you can gauge growth trends and understand the effectiveness of sales strategies. This metric helps you plan budgets and forecast future earnings.
• Profit provides a deeper financial picture: Profitability measures like gross, operating, and net profit give insights into your business’s efficiency and overall financial stability. These metrics help you assess operational effectiveness and investment potential.
• Balancing revenue and profit is key: While revenue indicates business growth, profit reflects financial sustainability. Understanding and managing both can lead to informed decision-making and strategic planning for long-term success.

How to calculate revenue vs. profit

Calculating revenue vs. profit is simple when you know the formulas. But you’ll always need to calculate revenue first since the profit formula requires revenue.

To calculate the revenue, multiply the subscription fee by the number of subscriptions during a time period and then subtract any refunds.

Make sure to use data for the same time frame to collect revenue. For instance, if you’re calculating monthly revenue, use the monthly subscription price and the total number of monthly subscriptions.

Here, the subscription price may vary depending on different tiers (or plans). Similarly, you may offer a discount for an annual subscription. If that’s the case, multiply the different subscription fees by the number of subscribers using that plan and sum up the acquired products.

Once you have the revenue, you can calculate profit (or net profit) by subtracting total expenses (COGS, operating expenses, debts, and taxes) from total revenue and other income.

Essentially, you account for all cash inflows and outflows to reach your profit or bottom line. Here, other income includes income from investments or the sale of an asset.

Now that you know how to calculate revenue vs. profit, let’s talk about other SaaS metrics you should know as a SaaS business owner.

Additional SaaS metrics to consider

While revenue and profit are key metrics for any business, SaaS business owners should also look at other metrics to better understand the company’s financial health.

1. Customer acquisition cost (CAC)

Customer acquisition cost (CAC) is the money you spend on average to acquire one customer. A higher CAC means a company will have to retain customers for more time to get a positive return on its investment.

CAC is important for almost any industry you can think of, but more so for the SaaS industry since the SaaS business model’s profitability depends on the customer’s lifetime value.

For this reason, lowering CAC can have a visible impact on your company’s total income. Here’s how you can calculate CAC:

2. Average revenue per user (ARPU)

The average revenue per user (ARPU) is a useful metric for any business, especially for subscription-based businesses. It shows how much money the business gets from an average user.

As a SaaS business owner, knowing how to draw insights from your ARPU is important.

Suppose you offer 10% on new sign-ups. As more subscribers use your offer, the ARPU will decrease. But this decrease isn’t a bad sign.

However, if your ARPU falls in isolation, look for reasons users refrain from spending on your services. For instance, a new competitor may offer better premium plans, and your high-plan users may shift to that service.

Also, ARPU might increase even with subscriber loss and negative revenue growth. Make sure to use ARPU with other SaaS metrics to have a more accurate picture of your business’s financial situation.

Here’s how you can calculate ARPU:

3. Lifetime value (LTV)

Lifetime value (LTV) or customer lifetime value (CLV) is an estimated SaaS metric that shows the total net profit the company will generate from a user throughout their relationship.

LTV helps you understand your customer’s worth and make strategic decisions regarding marketing, advertising, and revenue forecasting. For instance, a CAC of $200 may sound bad, but a corresponding LTV of $600 would make up for it.

Here’s how you can calculate LTV:

Here, the churn rate is the ratio of customers who stopped using your service to your total customers during a time frame. For instance, if you’d 1000 users during a specific year and 50 users canceled their subscription, your churn rate would be 5% for that year.

LTV, CAC, and other SaaS metrics collectively make up a crystal ball for your business. If you don’t want to spend time calculating these, you can use software that automatically aggregates financial data into a single dashboard.

Revenue vs. profit FAQs

Can profit be higher than revenue?

Theoretically, net profit can be higher than revenue when a company’s income through non-core business operations, such as the sale of investments, temporarily exceeds operating costs. For example, if a business earning $50,000 in revenue with operating costs of $10,000 sells assets worth $20,000, their net profit of $60,000 would exceed revenue.

How much of revenue is profit?

The amount of profit generated compared to your revenue depends on your gross margin. It subtracts the cost of revenue from net revenue to tell you how much money you keep for every dollar you make.

What is a good annual revenue?

Benchmarks for “good” annual revenue depend heavily on the growth stage for VC-backed SaaS companies. While there’s rarely a one-size-fits-all answer, here are some rough guidelines for what good annual revenue is for a startup about to raise a round:

• Series A: $1 million to $2 million ARR
• Series B: $3 million to $7 million ARR
• Series C: $7 million to $25 million ARR
• Series D and beyond: $75 million to $100+ million ARR