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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