Calculating Shopify Net Profit to Reveal Cash Drains and Wins

Growing a store comes with countless expenses. You spend money to procure products, package and ship orders, run ads, and cover operational costs, all while hoping the numbers add up at month-end. 

But when you finally sit down to see how much you have made, your savings don’t reflect that effort. Somewhere along the way, profits leak out, maybe through discounts, refunds, ad spend, or overheads, leaving you clueless about your actual performance.

That’s exactly why calculating net profit matters; to see where you’re earning, where your cash flow is being drained, and, above all, reveals how profitable your business actually is. This level of clarity gives you the power to decide how much you can confidently keep and reinvest for growth.

Wouldn’t you want that kind of clarity?

In this blog, we’ll guide you step by step on calculating your net profit, highlight the key metrics that matter, and show how to fix issues when profit margins are at risk. 

How to Calculate Net Profit for Shopify Stores

Calculating profit isn’t just about how much you keep at the end of the month, but also about spotting where costs are eating into your margins. If you keep a close eye on your profits along the way, you can catch losses early and make up for them elsewhere in your sales funnel. 

To know exactly where your profits are slipping, let’s do the profit calculation in four stages. 

Stage 1: CONTRIBUTION MARGIN 1 (GROSS PROFIT)

CM1 shows your product profitability before considering fulfillment, marketing, or overhead.

Formula: CM1=Total Sales−Product COGS

Where,

Total Sales = Net Revenue (Gross Revenue – Discounts – Refunds) + Shipping & Tax   Collected
Product COGS = Cost of Goods Sold (the cost to produce or buy your products).

Stage 2: CONTRIBUTION MARGIN 2 (CM2)

CM2 shows your profitability after you have delivered the product to the customer 

Formula: CM2 = CM1−Fulfillment Expenses

(Where,  Fulfillment Expenses = shipping cost, handling cost, return handling cost, tariff cost, and payment processing fee)

Stage 3: CONTRIBUTION MARGIN 3 (CM3)

Shows how much profit remains after all ad marketing expenses

Formula:  CM3 = CM2−Ad Spend

Where ad spend includes Meta ads, Google ads, Others and non-ad marketing costs

Stage 4: NET PROFIT

This is where you see your true bottom line. After deducting all upfront costs, your revenue takes its final cut with operational expenses, showing whether your business is truly profitable. What’s left is yours to keep and reinvest in future growth.

Formula: 

Net Profit = CM3 – Operational Expenses

Where operational expenses include salaries, rent, maintenance, professional fees and interest payments. 

How to Diagnose Profit or Loss Made 

Let’s see how the framework works in practice. We have worked out two scenarios for you to trace how each stage of your product journey affects your margins. 

To make the comparison easier, let’s assume gross revenue, shipping collected, and product costs remain the same in both scenarios. This way, we can focus on how differences in refunds and discounts, fulfillment, advertising, and operational costs impact profitability. 

Before arriving at gross profit, you first need to find your total sales – the real revenue you have to work with before deducting expenses. This involves adjusting for refunds, discounts, shipping, and taxes. 

P.S.: If you don’t factor in refunds and discounts properly, your profit will look higher than it really is, making the rest of your profit calculations inaccurate. 

Let’s break it down in 2 steps.

Gross Revenue to Net Revenue

The first step is to account for discounts and refunds, which is an early margin killer. Even before other costs come into play, a large chunk of your revenue can disappear here. 

Formula:
Net Revenue = Gross Revenue – Discounts – Refunds

• Scenario 1: $70,000 – $700 = $63,000 → strong start.

• Scenario 2: $70,000 – $15,000 = $55,000 → weak start

Insight:

Scenario 1 is relatively unaffected, while Scenario 2 loses a significant portion of its margin right at the beginning, which may also inflate fulfillment costs later, if returns are high.

From Net Revenue to Total Sales

Next, add any shipping or taxes collected, which effectively boosts your margin. 

Formula:
Total Sales = Net Revenue + Shipping & Tax Collected

• Scenario 1: $63,000 + $5,000 = $68,000

• Scenario 2: $55,000 + $5,000 = $60,000

Insight: 

Scenario 1 was able to recover much of the margin lost earlier to refunds. Scenario 2’s margin was hit hard earlier, so the added shipping revenue couldn’t recover much.

Now that we have total sales, we can start deducting each major cost to see exactly how much margin remains at each stage.

Calculating CM 1 or GROSS MARGIN 

Deduct product costs (COGS) to see how much your products alone eat into the margin. Low CM1 usually points to high product costs or heavy discounting or low product margins

Formula: Total sales - product COGS

• Scenario 1: $68,000 – $20,000 = $48,000

• Scenario 2: $60,000 – $20,000 = $40,000

Insight:

Product costs feel heavier when your margins are already tight. After deducting product costs, Scenario 2 is left with thinner margins compared to Scenario 1. 

Calculating CM2

Next, let’s deduct fulfillment expenses, which cover shipping, packaging, and order handling. 

Formula: CM1- Fulfillment Expenses

• Scenario 1: $48,000 – $8,000 = $40,000

• Scenario 2: $40,000 – $10,000 = $30,000

Insight:

As noted earlier, higher returns lead to higher fulfillment costs, which further shrink Scenario 2’s margin. Scenario 1 performs better in comparison. 

Calculating CM3

Then, subtract ad spend to see how marketing impacts your remaining margin. This is the stage where scaling decisions matter most. 

P.S.: Make sure you’re including all paid channels and don’t forget to manually add influencer fees or affiliate commissions, since they don’t always show up in automated reports.

Formula: CM2 - Ad spend

• Scenario 1: $40,000 – $8,000 = $32,000

• Scenario 2: $30,000 – $2,000 = $28,000

Insight

Now the tables have turned. Scenario 1, which was doing better so far, has its margin drop due to higher ad spend. But Scenario 2 spends less on ads and saves more margin for upcoming costs.

Finding Out NET PROFIT

Finally, subtract operational expenses, such as salaries, software, and overhead, to arrive at net profit.

Formula:  CM3 - Operational expenses

• Scenario 1: $32,000 – $5,000 = $27,000

• Scenario 2: $28,000 – $1,000 = $27,000

Insight

Here again, Scenario 1 has spent heavily on operations, whereas Scenario 2 limits its spending, protecting the remaining margin. 

Conclusion

Early losses can limit the flexibility to cover other expenses later. In Scenario 2, higher refunds and discounts early on reduced the net revenue, putting it at a disadvantage from the start.

Initially, we expected Scenario 1 to be more profitable since it started with higher margins. However, as advertising and operational costs kicked in, the margin dropped sharply. On the other hand, by keeping spending in check, Scenario 2 was able to maintain its margin without incurring further losses.

Interestingly, both scenarios arrive at the same net profit, despite having very different cost structures. This highlights the importance of tracking margin at each stage because it’s not just the final profit number that matters, but where profits are earned or lost along the way. With clear visibility into how each cost impacts your business, you gain the power to turn cost inefficiencies into real opportunities for growth.