Profit isn’t one number—it’s multiple different stories

 

Most leaders think profit is simple.
Revenue comes in, expenses go out, and profit is what’s left.
But here’s where they're wrong:

Profit isn’t one number—it’s multiple different stories.

Gross profit. Operating Profit. Net Profit.
And the elusive Contribution Margin.

Each one answers a different question about your business.

Confuse them, and you’ll misprice products, miss operational inefficiencies, and mislead stakeholders.

1️⃣ Gross Profit: Production Efficiency

Gross Profit tells you how much revenue remains after covering the cost of goods sold (COGS).

↳ Formula: Revenue - COGS

↳ Use it to:
• Validate pricing
• Evaluate production efficiency

↳ Limits: It ignores all non-production costs.

2// Contribution Margin: Pricing Power

Contribution Margin (not Profit) measures revenue after all variable costs.

↳ Formula: Sales Price - All Variable Costs (production and non-production)

↳ Use it to:
• Optimize pricing and sales mix
• Perform breakeven analysis

↳ Limits: Typically focuses on unit-level not overall profitability

3// Operating Profit: Operational Effectiveness

Operating Profit includes all operating costs, giving a wider view of the business efficiency.

↳ Formula: Revenue - COGS - Operating Expenses

↳ Use it to:
• Diagnose inefficiencies
• Measure core business health

↳ Limits: Excludes interest and taxes—so it’s not the “bottom line.”

4// Net Profit: Overall Profitability

Net Profit is the bottom line, showing revenue after everything—COGS, operating expenses, taxes, and interest.

This is what grows the equity on your balance sheet.
Or what shrinks it in the case of a Net Loss.

↳ Formula: Revenue - All Costs and Expenses

↳ Use it to:
• Evaluate overall financial health
• Communicate profitability to stakeholders

↳ Limits: Great for the big picture, but not for identifying specific issues.

The Takeaway:

Each profit margin answers a specific question:

• Gross Profit: Are we producing efficiently?
• Contribution Margin: Are we pricing correctly?
• Operating Profit: Are we running effectively?
• Net Profit: Are we truly profitable?

Stop treating margins as interchangeable.

Use them strategically, and you’ll make smarter decisions that drive your business's profitability.

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Margin is not Markup

 

▶️ Margin shows how much of a product's sales price or revenue you got to keep.

▶️ Markup shows how much over cost you've sold your product(s) for.

🎯 Let's dig deeper into each of these .

1// Margin (or Gross Profit Margin in this case) is the proportion of a product’s Sales Price that exceeds the Product Cost.

☑️ Margin = (Product Sales Price - Product Cost)/ Product Sales Price

☑️ Margin = Gross Profit per Product / Product Sales Price x 100

Note that Margin is calculated as a percentage.

Meanwhile, Gross Profit is calculated as an amount.

2// Markup is the proportion by which you increase the Product Cost to arrive at the Sales Price.

☑️ Markup = (Product Sales Price - Product Cost)/ Product Cost

☑️ Markup = Gross Profit per Product / Product Cost x 100

Markup can be calculated based on a product's variable cost or based on its total (absorption) cost.

☑️ Marking up the variable cost could result in under costing and underpricing the product, which in turn may increase revenues at the expense of reduced profitability and cash flows.

💎 Use Cost-Volume-Profit analysis to determine the number of units you will need to sell to break even.

☑️ Marking up the absorption cost could result in over costing and overpricing, which in turn could reduce revenues also at the expense of reduced profitability and cash flows.

💎Be careful with the fixed manufacturing depreciation expense which gets included in the full/absorption cost of a product.

🎯 To calculate your margin if you know your markup: ☑️ Margin = Markup /(1+Markup)

🎯 To calculate your markup if you know your margin: ☑️ Markup = Margin / (1-Margin)

🎯 How to use Margin and Markup:

☑️ Both Margin and Markup calculate the difference between price and cost.

☑️ Margin relates that difference to Price or Revenue.

☑️ Markup relates that difference to Cost.

☑️ If you know the Product Cost, use Markup to determine an appropriate selling Price.

☑️ If you know the Product Gross Profit, use it to determine the Gross Profit Margin and track profitability over time.

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