Understanding the Revenue vs Profit Equation for Your Online Store

Gross revenue and net profit are terms you’ve likely heard as a business owner. But do you know what they are and how they impact your business?

They aren’t just any metric; we are talking about the two most key metrics in a business. Keep reading as we look at revenue vs profit and discuss everything we know about them.

Revenue vs. Profit: Key Distinctions

As an entrepreneur or ecommerce business owner in Pakistan, knowing the differences between revenue and profit is key. You also need to know how to calculate them. Why? Because you have to grow your profits to thrive. But you can’t be sure you’re growing if you don’t know your current profit.

Besides that, it’s impossible to leave out revenue when looking at profit in the company’s financial reporting. Both terms are quite important. From here till the end, we highlight revenue vs profit and their key differences.

Revenue

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The net revenue refers to the total gross earnings from business activities before expenses. It’s found at the top line on the company’s income statement.

For example, think of a restaurant that sells local food. It makes money from food orders but it might also receive income from investments or renting out the venue for special events. Its revenue stream includes all the sources of income generated. This shows that revenue represents how a company generates funds.

Meanwhile, EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It tracks how much the company earns before interest and taxes after removing operating expenses. It measures the company’s ability to generate operating income.

Profit

Profit, the bottom line income statement, is the company’s net income within a set timeframe. There are various ways to gauge profit, like gross and operating profit.

The gross profit is the revenue earned minus the cost of goods sold (COGS). Let’s use a profit example. If the monthly recurring revenue is PKR 1,000,000 and the COGS is PKR 600,000, your gross profit is PKR 400,000. 

Unlike revenue, operating profit is gross profit minus all of the running expenses incurred. These may include rent, utilities, and payroll. Overall, profit measures a company’s financial performance. 

Below is a table showing the difference between profit and revenue.

Revenue	Profit
It’s the total gross income from all income sources	It’s the net income remaining (total income – total business expenses)
Found at the top of the income financial statements only	Found all over the income statement and at the bottom
Focuses only on the inflow of cash	Considers both inflows and outflows
Accounting rules and standards have little impact	Affected by accounting rules
It tracks the company’s sales performance, not overhead costs	It shows a company’s overall money and health

Gross Revenue: The Starting Point

Gross revenue is the top line of the income statement. So it’s commonly referred to as the starting point for tracking progress via financial data. 

We can start calculating revenue by multiplying the total quantity of units sold by the unit price. In each revenue cycle, note all sources of income before recording revenue (revenue recognition).

Gross Revenue = Gross Sales × Unit Price

For example, if a shoe retailer in Islamabad sells 500 pairs of shoes at PKR 500 each, the gross revenue would be:

Gross Revenue = 500 × 500 = PKR 250,000.

One of the main factors that drives revenue growth is demand. As an online business owner who aims to increase revenue, you should know the factors that drive demand and grow your average revenue. These include competition, pricing, marketing efforts, and sales strategies. All of these factors will help with revenue forecasting.

Operating Costs and Expense Management

Running a business without operating expenses is impossible. So you must find new ways to control them. 

Costs are either fixed (e.g., rent, salaries) or variable (e.g., raw materials, utilities). Proper cost division and revenue handling are key to optimizing the company’s profitability. Here is the formula for calculating operating costs:

Operating Costs = Direct Costs + Variable Costs

For example, if your company’s fixed cost is PKR 10,000 per month and variable cost is PKR 50 per unit produced. If it produces 1,000 units in a month, the operating costs would be:

Operating Costs = 10,000 + (50 ×1,000) = PKR 60,000.

Net Profit Margin: The Ultimate Indicator

Net profit margin (also called profit margin percentage) calculates and compares the net profit to the revenue. 

The profit margin formula is: 

Net Profit = Total Revenue minus Total Expense

Net Profit Margin = (Net Profit / Revenue) ×100

Let’s see an example of applying the profit formula. If a company’s revenue is PKR 1,000,000 and its net profit is PKR 200,000, the net profit margin would be:

Net Profit Margin = (PKR   200,000 / PKR 1,000,000) ×100 = 20%.

What Impacts Profit?

All of the factors that affect your ecommerce revenue streams also affect your profit. But, COGS and expenses impact profit more. Looking at the calculation above, if the total costs were PKR 400,000, the company makes a PKR 600,000 net profit. 

This shows that the company needs to cut costs. Keep reading to learn new ways to drop these costs and increase ecommerce profit.

Factors Impacting Profit Margins

Profit margin analysis can help determine what factors affect your money’s health. 

We’ve listed some of them below:

• Better Ecommerce Cost Management: Cutting costs and other expenses for your business helps increase profit. 
• Enhanced Pricing Strategies: Review your pricing model and choose one that consumers will love. So as to boost revenue. 
• Focus on Customer Value: Focus on impressing customers to grow both revenue and profit. The more customers find value, the more likely they will continue to buy.

In the case of the restaurant, they can source fresh food ingredients locally and cut costs by negotiating with suppliers. This way, they can increase their profit margin ratio by cutting costs and increasing value. 

Key Ecommerce Metrics

Studying your numbers is a sure way to get better. They are also called ecommerce financial metrics. We nosedive into five of them below from Gross Merchandise Value (GMV) to Conversion Rate. 

Gross Merchandise Value (GMV)

GMV is the total price of goods an online store sells via a marketplace at a known time. It is a key value when you want to know your full ecommerce business performance. But, it doesn’t account for discounts, and just like revenue, it will not account for refunds. 

How to Calculate: GMV = Total Sales Volume × Sales Price

Let’s say an ecommerce business owner who sells kurtas and shoes is trying to calculate his GMV for a month. He sold 100 kurtas at PKR 3,000 each and 200 pairs of shoes at PKR 4,000 each. 

His GMV would be: 

(100 kurta sets X PKR 3,000) + (200 shoe pairs X PKR 4,000) =

= PKR 300,000 + PKR 800,000 = PKR 1,100,000.

Customer Acquisition Cost (CAC)

Customer Acquisition Cost (CAC) is also key to figuring out whether your marketing strategy is profitable. This metric tracks the costs it takes to win over a new customer. It will calculate your marketing and sales costs in bagging a new buyer. 

How to Calculate: Total Marketing and Sales Cost / Total New Customers 

So, If you spent PKR 500,000 on promotion to attract 1000 new customers, your CAC would be:

PKR 500,000 / 1,000 customers = PKR 500 per customer.

Customer Lifetime Value (CLTV)

Customer Lifetime Value (CLTV) helps an e-commerce business gauge the long-term value of its clients. It helps you know how much to expect from one customer throughout their active time. If you can project this value, you can create plans and loyalty programs to get them to stay longer or increase their spending.

How to Calculate:

CLTV = Average Order Value (AOV) × Number of Purchases per Year × Customer Lifespan.

For example, if a company has customers who subscribe to their plan worth PKR 2,000 for an average of 12 months, then the CLTV  of one customer is:

PKR 2,000 X 12 times X 1 = PKR 24,000.

Average Order Value (AOV)

Average Order Value (AOV) refers to the average amount that each customer has spent per order. Keeping up with this metric helps impact revenue. If you manage to grow this metric without getting new customers, you’ll see an increase in revenue, too. 

How to Calculate: AOV = Total Revenue / Number of Orders

If an online store sold 150 smartphones, each for PKR 20,000, and 50 tablets for PKR 30,000 each, the AOV would be:

(150 smartphones X PKR 20,000 + 50 tablets X PKR 30,000) / (150 + 50) orders =

= PKR (3,000,000 + 1,500,000) / 200 orders =

= PKR 4,500,000 / 200 = PKR 22,500.

Conversion Rate

Conversion rate is the percentage of traffic that completes the desired action (e.g., buying something). However, it’s not only limited to sales. The action could also be sign-ups and inquiries. This metric is key for measuring your ecommerce return on investment (ROI).

How to Calculate: Conversion Rate = (Number of Actions / Total Number of Visitors) X 100

For example, if you had 10,000 visitors last month and 1,000 made a purchase, your conversion rate will be 10%. 

Breakdown = (10,000 purchases / 1,000 visitors) X 100.

Revenue Growth Strategies

The secret to growing profit is cutting costs and revenue growth. So, you need to develop revenue growth strategies. 

Imagine the restaurant increasing its revenue to PKR 1,200,000 and dropping its cost to PKR 200,000. This means that its profit will grow to PKR 1,000,000. 

Below, we explore different growth strategies for generating revenue: 

• Market Expansion: Research and explore new market segments or locations that would enjoy your offerings. You can reach new markets with solid marketing and sales strategies.
• Product Diversification: Launch new products and services that your customers want. Next, take advantage of cross-selling and upselling to boost additional income streams.
• Strategic Partnerships: You can partner with distributors in and outside the country to access new delivery channels. This way, your company’s products can reach your partners’ existing customer base. 

For example, software companies can boost how they generate revenue with new products to satisfy various market segments. Lastly, you should avoid making mistakes when recording or calculating your income to prevent loss of revenue.

Pricing Strategies and Profit Maximization

Earlier, we discussed the importance of a pricing strategy in profit maximization. This leads us to the profit motive. It’s a driving force behind Pakistani businesses that aim to boost profits by increasing actual revenue and reducing costs. 

In this section, we expand on pricing strategies that will improve ecommerce profitability:

• Value-Based Pricing: This is a price strategy where the increment of value results in increased cost. This helps customers value your offer. To ensure this, you should focus on quality, features, and benefits rather than solely on the cost of producing goods. Apple is a famous company that adopts value-based pricing. With each new smartphone launch, there is a higher value offer. For example, the iPhone 15 has the iPhone 15 Pro and iPhone 15 Pro Max, which are more expensive.
• Dynamic Pricing: Due to demand fluctuation and competitor pricing, you may think about dynamic pricing. It’s a case where selling price increases and decreases are rapid and vary based on the demand.
• Bundling and Packaging: This strategy is about providing value-added or bundling for upsell and cross-sell products.
• Promotional Pricing: This is for short-term revenue objectives where you use discounts and incentives. Their main goal is to stimulate demand for your products or services sold.

These pricing models can be used together or separately. Still, you should focus on one at a time for revenue and profit maximization. 

Cost Reduction Techniques

One of the biggest plans for growing profit is dropping costs. With more profit, you can increase your investment in promoting your business and pay employees and yourself. But how do you reduce the total amount of costs? 

Below is how:

• Supply Chain Optimization: Make your supply chain process simple and negotiate with your suppliers to drop costs. This is especially true if it’s a long-term relationship.
• Adopt Automation: Use an automation system to automate repetitive and time-consuming tasks. Also, eliminate unnecessary and money-consuming steps.
• Work Remotely: Working from home is a great way to cut company costs. Invest in a minimal office workspace in your home. Otherwise, if you need to meet your employees, cut costs by renting a space for short-term use. 
• Cost-effective tools: Make use of digital solutions that make it easy to run your business and are cheap. For example, use an online shop platform that helps drive traffic to your store and makes back your investment in due time. Also, use automation tolls on a cheaper plan.

Lastly, deliver on your promise so you don’t waste resources on returning or refunding unhappy customers. It costs a lot to return and give customers another product. If care is not taken, it can result in operating loss.

Measuring Profitability: Ratios and Formulas

When it comes to profit, there are different formulas to measure it and assess a company’s financial health. 

Below are more formulas and terms for your ecommerce profitability analysis. They can help check your revenue, assets, and equity impact:

• Gross Profit Margin:  Gross margin helps you find the percentage of revenue left after removing the cost of goods sold (COGS).

Formula: Gross profit / Revenue x 100

• Net Profit Margin: This is the net income after removing all the expenses. This includes taxes and interest expenses. It’s also called the profit margin ratio.

Formula: Net Profit / Revenue x 100

• Profit and Loss Statement: A profit loss statement is an income statement. It summarizes a company’s revenue, expenses, and profit or loss over a time frame (usually a quarter or a year). An annual recurring revenue report is often considered essential to produce because you’ll most likely need it to declare your revenue to the IRS in Pakistan. You can either have a total profit or loss.

Formula: Net Profit = Total Revenue – Total Expenses.

• Return on Investment (ROI): ROI is another key metric you can calculate with profit.

Formula: Net profit / Total investment X 100%.

With the help of these formulas, you can cultivate good financial health for your business. They can also reveal what areas need improvement, especially with expenses. Also, they can help you figure out whether you need to tweak your marketing strategy or cut costs. 

Profit vs. Cash Flow: Understanding the Differences

Profit and cash flow are two related but distinct terms. One is the actual net earnings of the company, while the other is the inflow and outflow of money. 

We discuss it further using the table below:

	Profit	Cash Flow
Definition	Profit is the difference between revenue and expenses. It aims to measure the monetary level of a company.	Cash flow is the movement of cash in and out of a company. It measures how a business generates income.
Measurement	Profit is calculated using costs and revenue gathered over time, including accrued revenue.	Cash flow is calculated in real time by tracking actual cash inflows and outflows at a given period.
Timing	Profit may not align with cash flow due to timing differences in costs and revenue. This leads to differences between reported profit and actual cash position.	Cash flow reflects the real-time of cash receipts and payments.

Financial Planning for Sustainable Growth

Planning for your financial health is essential, as every other aspect of your business counts on it. You need to create a budget and set and allocate resources to stop wasting time or money. Planning also helps you identify expenses from the onset and have a complete picture of your company’s financial position. 

Below is information on how to make a financial plan for sustainable growth:

• Set goals: Outline clear financial goals, such as revenue targets, profit margin ratio, and ROI level.
• Budgeting: Create a budget to allocate cash for all core business activities. These include net sales, marketing, operations, and capital expenditures.
• Risk Management: Firstly, you need to know about possible financial risks like market volatility and regulatory changes. They affect both operating and non-operating revenue. Then, develop a plan to control them, like diversification, insurance, and contingency planning.

It’s essential to take risks, but always ensure they are calculated. High risk often comes with high rewards, but nothing’s guaranteed. How much are you willing to sacrifice, and what is your risk appetite? 

Always consider these before you take any risk. Also, have an accurate picture of your company’s finances and whether you can afford to take it.