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"We made a profit" can mean two very different things depending on which number you're looking at. Confusing gross profit with net profit is one of the most common — and most consequential — mistakes in small-business pricing.
Gross profit: revenue minus the direct cost of what you sold
Gross profit is revenue minus the direct cost of producing what you sold — materials, direct labor, whatever was spent specifically to deliver that product or service. It answers: for every sale, how much is left after covering what it actually cost to make or deliver it?
Net profit: what's left after literally everything
Net profit takes gross profit and subtracts everything else — rent, insurance, software subscriptions, administrative time, marketing, interest, taxes. It answers a much bigger question: after running the entire business for this period, is there actually anything left over?
Why the difference matters for pricing
A healthy gross profit margin can hide an unhealthy net profit margin. A product with a strong 60% gross margin can still leave the business unprofitable overall if fixed costs — rent, salaries, everything not tied to a specific sale — outweigh what all that gross profit adds up to across the whole business. Pricing decisions made only by looking at gross profit risk setting prices that feel profitable per sale while the business as a whole loses money.
A concrete example
Sell a service for $1,000 where direct costs (materials, contractor labor) are $400: gross profit is $600, a 60% margin — that looks healthy in isolation. But if the business's fixed costs (office, software, your own admin time, insurance) run $500 per similar job on average, net profit on that same sale is only $100, a 10% margin. Both numbers are correct; they're just answering different questions.
Use both, for different decisions
Gross profit is useful for comparing the profitability of individual products or services against each other — which one is worth doing more of. Net profit is what tells you whether the business as a whole is actually making money. Our margin calculator and markup calculator work at the gross-profit level — useful for pricing individual jobs, but worth checking against your actual net numbers periodically to make sure per-job profitability is translating into a genuinely profitable business.