Lesson 1 of 6
COGS, gross margin and net profit explained simply
Learning objectives
- Define COGS, gross profit, gross margin and net profit in plain English
- Understand why gross profitable products can still lose money
- Calculate margin for one of your own products
- Spot the costs most founders forget
The four numbers, in plain English
COGS (cost of goods sold) is what each unit costs you. For a physical product this can include manufacturing, packaging, inbound shipping, duties and fulfilment costs depending on your accounting method.
Gross profit = revenue − COGS. Gross margin = gross profit ÷ revenue, expressed as a percentage. Net profit is what's left after everything else: ads, software, wages, rent, photography, returns and admin.
A worked example
Product sells for £50. COGS is £20. Gross profit is £30. Gross margin is 60%.
If ads, fulfilment, transaction fees and overhead cost another £25 per order, net profit is only £5. The product looks healthy at the gross line and barely alive at the net line. This is where most product founders deceive themselves.
The costs most founders forget
Returns and refunds, transaction fees (Stripe, PayPal, platform fees), photography, sampling, ad creative production, customer support time, refunds chargebacks, and the cash cost of stock sitting on a shelf for three months.
Founder insight — Derrick Twum
If you cannot explain your gross margin and net profit per order in one breath, you do not control your product business yet — it controls you.
Key takeaway
Gross margin tells you if the product can survive. Net profit tells you if the business can survive.
Reflection questions
- 1What is your true COGS per unit, including packaging and fulfilment?
- 2What gross margin would feel safe for you?
- 3Which 'forgotten' costs are eating you alive right now?
Action task
Pick one product or product idea. Calculate gross profit, gross margin and an honest net profit estimate.
Worksheet
Work through these prompts. Answers save to this device.
Answers are saved to this device only. Cloud sync coming soon.