Whether you’re new to the ecommerce industry or a well-seasoned veteran: you should know the difference between revenue vs profit.
It’s essential to understand these business accounting concepts to examine your company's performance and general financial health. Although revenue and profit have become mainstream, they are generally misunderstood and frequently used interchangeably.
So, knowing the difference between what is revenue vs profit and how they’re related allows you to determine whether a business is succeeding or failing. That’s why we’ve come up with a guide for everything related to revenue and profit.
What is Revenue & How Can You Calculate It?
Revenue can be simply defined as the money you earn from your regular business operations. If you’re referring to the revenue line item in an income statement as the "top line," then you’re referring to sales.
When you multiply the average sales price by the units sold, you get revenue over a month, quarter, or year.
Typically, a company's ability to pay down debt and turn a profit increases with revenue generated. So, your long-term financial performance and stability depend on maintaining or increasing your business's overall revenue.
However, there are a few concepts for revenue you should be aware of:
Gross Revenue
Gross revenue is the total amount made within a specific period from all business activities, including the sale of goods and services and more, when all business expenses are excluded.
Similar to the formula given for revenue, gross revenue should be calculated accordingly:
In fact, gross revenue is one of the criteria used by external stakeholders to evaluate if a company is a safe place to invest or not.
Net Revenue
Well, net revenue is related to gross revenue, and it can be defined as the total income a business earns after you subtract the costs such as refunds, discounts, etc. This metric gives a clearer overview of the business’s income flow.
It can be calculated using the following formula:
You might be wondering about the difference between net revenue vs profit. Profit is actually calculated by subtracting operating and other necessary expenses from net revenue, but you can learn more about that in the section below.
Average Revenue Per User (ARPU)
Primarily used for digital businesses such as SaaS and ecommerce companies, ARPU refers to the average revenue generated per active customer within a time frame.
So, you can use the following formula to calculate ARPU:
In conjunction with lifetime value, ARPU allows you to calculate the user acquisition costs required to maintain a positive return and to clearly understand the quality of users coming from various channels.
Monthly Recurring Revenue (MRR)
Similar to ARPU, monthly recurring revenue is usually used for companies with a subscription or user-based model. As the name suggests, MRR looks at the revenue generated every month from active users, which is calculated using the formula below:
Suppose you’re charging $5 a month for premium shipping and you have a total of 10,000 customers who’ve subscribed, then your MRR would be $50,000.
By tracking MRR, your team can determine which plans are popular among customers, you can also identify which type of customer is more interested. So this allows you to create more personalized plans, which will ultimately boost sales and increase customer satisfaction.
Annual Recurring Revenue (ARR)
Lastly, let’s discuss what annual recurring revenue is: expected revenue from the customers on an annual basis. You can already tell that it’s similar to MRR, the only difference is that it provides an overview of revenue expected throughout the year.
Since this revenue allows you to see how your subscription model is performing, you can predict its success. Plus, you can use it as a baseline to calculate the company’s future income.
What Affects Revenue?
Now that you know what is revenue and a few of its counterparts, let’s discuss what can impact your revenue as well.
- Pricing of goods or services: Although this may seem obvious, if you’re charging too much compared to competitors, customers may likely leave. However, if the price is too low, you risk not covering your costs as a result, your company might be at a loss.
- Competition within the market: If there are too many competitors in the industry, you likely own a smaller share of customers compared to when there are fewer. So, this might make it more difficult for you to generate the revenue you need.
- Marketing initiatives: In an ecommerce business, marketing or advertising plays a big part in driving customers through the sales funnel. Depending on the success of your marketing campaigns, you can increase your revenue.
- Product demand & quality: You also have to think about whether there’s enough demand within customers to generate the revenue you’d like. Here product quality plays a part: so if you have a high-quality product, your customers are more likely to purchase it and vice versa.
Of course, some other factors affect revenue, such as economic conditions, but these are usually out of your control. By now, you should be well-versed in all things revenue, so let’s talk about the other side of the coin: profit.
What is Profit & How Can You Calculate It?
You’ve probably heard profit being called by many other names, such as net earnings, net income, and net revenue. And you already know what is net revenue vs profit as well.
But why are these terms used interchangeably? Well, these terms are related to deducting specific operating costs and expenses from a business's gross earnings or revenue.
So, we can define profit as the amount left over after all costs (wages, operating costs, etc) have been considered. As opposed to revenue, profit is also known as the ‘bottom line’ of the income statement. Taking that definition into account, we can formulate that it can be calculated as follows:
By now, you should understand what’s the difference between profit vs revenue. But let’s dig deeper into the types of profit needed to analyze your business’ financial health.
Gross Profit
Generally, gross profit refers to the revenue you’ve generated after subtracting the cost of goods (COGs). What do we mean by cost of goods? Well, these are the variable costs associated with being able to provide goods and services for example: cost of inventory, packaging and shipping costs, etc.
Here’s the formula you can use to calculate gross profit:
Using gross profit as a metric, you can understand how efficiently your business is utilizing resources, in addition to showing how much profit your products or services are bringing in. So, if you want to operate at a higher gross profit, you should look at how to optimize your process.
Net Profit
We’ve mentioned that profit is the bottom line, however, if you’re talking about the real bottom line of the income statement, it’s net profit.
We can define net profit as the revenue remaining after subtracting operating expenses (i.e. payroll, utilities, rent) and taxes. So, we can calculate it using the formula below:
If your company has a positive net profit over time, it shows stability and potential for long-term growth, which provides a better outlook for potential investors.
Ultimately, both gross profit and net profit are required to perform financial evaluations within your company.
What Affects Profit?
No matter what type of profit you’re calculating, it’s dependent on revenue. So, we can say that whatever factors affect revenue should, in turn, affect profit.
Apart from that, let’s look at a few other factors that may impact profit:
- Operating expenses: Apart from fixed costs such as rent and utilities, other costs, such as a rise in raw material prices, may increase, forcing you to increase the price of your products. Otherwise, if you are still at the same price point, you can face a loss.
- Taxes and interest: Policy changes can cause taxes to rise depending on where your company is based, which affects your net profit. Moreover, if you’re on a loan from the bank, interest rates can also add up to reduce your profitability.
Other than that, we should keep an eye out for general market conditions to see how they affect revenue and then consider them when calculating profitability.
Revenue vs Profit - What’s the Difference?
By now, you should already be familiar with the difference between revenue vs profit. In case you want to quickly go through it again, here’s a table that we’ve put together:
| Revenue | Profit |
|---|---|
| Simply the amount generated through sales | Amount remaining after subtracting operating expenses |
| Known as the top line of the income statement | Known as the bottom line of the income statement |
| Indicates market demand for products and services | Shows management of fixed and variable expenses |
| Shows the financial trends over time, which helps set goals | Usually used as an indicator for future investments |
So you can see the biggest difference between the two is that revenue doesn’t consider redacting expenses, whereas profit does, which can cause it to be a negative figure. Within the income statement, the top line of the statement shows revenue; then, it lists the various sorts of expenses before coming to the bottom line, or net income/ profit.
How to Calculate Revenue to Profit
For many executives and analysts, net profit is the most important part of an income statement. This can be determined by deducting all of the company's expenses from its revenue. So we should start by calculating the net profit in the following steps:
1. Find out the net revenue
You can use net revenue to provide a more accurate picture of a company's sales performance. Calculate it by taking into consideration the total revenue minus the discounts and returns.
2. Take the cost of goods into account
Cost of goods refers to the direct costs required to produce the product or service, but you don’t need to consider administrative expenses.
3. Calculate the gross profit
As mentioned before, you can find gross profit by subtracting the cost of goods from net revenue.
4. Deduct operating expenses
Once you’ve found out the gross profit, you should calculate what your operating expenses are such as rent, salaries, and utilities. Subtract it from the gross profit to obtain what is known as the operating profit.
5. Find and subtract interest and taxes
Similar to the net profit formula, you should subtract the interest and taxes paid from the operating profit. Here’s the final formula you can use to follow the steps above:
This brings you to net profit, which you can use to assess your company’s financial performance.
What’s More Important, Revenue or Profit?
As you can see, both revenue and profit are equally important to understand when running any business, be it ecommerce or SaaS.
However, as we’ve calculated above, we can see that net profit provides a more accurate picture when it comes to business performance. This makes it easier for stakeholders to assess the profitability and financial stability of the organization. Still, we do need to calculate revenue to find out what the net profit is.
Understand your Business Better with Whop
For ecommerce businesses, the question isn’t choosing between revenue vs profit. We know that profit is typically the most important metric for assessing financial health, but revenue is necessary for profitability, especially when you’re looking to expand your business. So, it’s crucial to continuously monitor both metrics. Still, there are many other metrics you should also consider.
With Whop, you can find communities, courses, ebooks and tools to help you on your ecommerce journey. Whatever you're selling, Whop has the resources to guide you to ecommerce success. Check out the Whop marketplace today and find your ecommerce education.
