Gross sales vs. net sales: Key differences explained
Gross sales and net sales are two metrics that offer distinct advantages when it comes to gauging revenue. Yet not many people can tell the difference.
Last updated October 13, 2022
As a sales manager, your eyes are glued to your company’s revenue. You’re focused on helping your team close more deals and increasing profitability. But are you sure you’re measuring sales revenue in the best possible way?
Gross sales and net sales are two common metrics that offer distinct advantages when it comes to gauging revenue. If you’re not sure what they are and how they differ from each other, you’re not alone.
Read on to learn what distinguishes these metrics and how you can use both of them to understand and increase your revenue.
What are gross sales?
Gross sales refer to the grand total of all sales transactions over a given time period. This doesn’t include the cost-of-sales or deductions (like returns or allowance).
To calculate a company's gross sales, add up the total sales revenue for a specified period of time—monthly, quarterly, or annually.
Gross sales formula:
Sum of all sales transactions + Sales discounts + Sales allowances + Returns = Gross sales
Gross sales serve as the basis for measuring top-line revenue within a certain timeframe. It would be impossible to calculate important revenue metrics, such as net sales and gross profit margins, without gross sales.
Let’s take a look at how gross sales work in the real world.
Suppose Joshua and Alicia run a bookstore called Spine & Label. During August, they sold 350 books for $125,000. This figure is the value of their gross sales because it includes only revenue, not costs.
While their gross sales numbers indicate revenue, it doesn’t represent the store’s profits. To get a complete picture of their selling performance, business owners need to use another metric: net sales.
What are net sales?
Net sales are the portion of revenue that remains after three types of deductions: allowances, discounts, and sales returns. This metric indicates a company’s profits, and it’s often reported on income statements.
Net sales are calculated by deducting the cost of sales—allowances, discounts, and returns—from the total revenue.
Net sales formula:
Gross sales (total revenue) – Allowances – Discounts – Sales returns = Net sales
- Allowances are price reductions offered to customers who purchased a defective item. The customers get a discount but keep the faulty item instead of getting their initial payment back.
Suppose some of Joshua and Alicia’s customers come back into the store to express their displeasure over a printing error. They give the disgruntled customers a partial refund of 30 percent off the initial price to keep their business. The collective allowance amount comes to $3,500, bringing down the total revenue to $121,500.
- Discounts are reduced prices offered to potential customers in order to motivate them to make a purchase. If the bookstore’s monthly discounts amount to $5,000, then gross sales go down to $116,500.
- Refunds are reimbursements given to buyers who return their purchases within a specified period of time. Let’s say 11 Spine & Label customers returned the books they purchased and received a full refund, and the value of customer returns came to $1,500. The net sales would be $115,000.
- Based on the net sales number, the owners of Spine & Label can evaluate ways to change and improve their sales strategy. For instance, they might find that they gave too many discounts, so they’ll need to form a plan around encouraging full-price purchases. But if giving out discounts actually drove sales numbers up, they can double down on discounts to encourage more customers to buy books.
What’s the difference between gross sales and net sales?
Gross sales do not factor in deductions, while net sales take into account all the costs incurred during the sales process. Net sales are a better measure of how much a business is making through sales.
Why do you need to track both net sales and gross sales?
Tracking your gross sales provides a way to measure the total amount of revenue made by sales teams. In the same view, net sales gives insight into the effectiveness of your team’s sales tactics as well as the quality of your products or services. Using both gross and net sales, you can understand how well your sales team is performing and how they can sell better.
Net sales help determine profit and identify potential problems
Net sales allow a company to better evaluate its profits because they include deductions such as allowances, returns, and discounts. This metric can also help you identify which costs are creating the greatest losses in the sales process. A high volume of discounts might attract business but severely cut into your profits. On the other hand, many allowances and returns signal the customers aren’t getting enough value from your product or service.
Monitor net sales to detect and solve these problems quickly. As a sales manager, you can create a plan around working with other teams to address customer concerns and discuss ways to add value to increase profits.
You can also use net sales to set meaningful goals for your sales team. Determine how much more revenue your company needs to hit sales targets, and set realistic quotas for reps based on those metrics.
Gross sales are used to calculate important sales metrics
Although gross sales do not accurately represent a company’s profits, they do provide a baseline for measuring important sales metrics.
For example, it would be impossible to calculate gross profit margin—an essential metric that shows total revenue earned during a specific period and indicates whether resources are used efficiently—without gross sales. And, of course, you can only calculate the net sales of a business by using gross sales.
Use a CRM to track key sales metrics
Gross sales and net sales are fairly easy to calculate. But they’re not the only sales metrics you should analyze and monitor regularly.
To avoid getting overwhelmed, use a sales CRM like Zendesk Sell to keep tabs on all the important metrics. Zendesk automates the measurement of sales metrics so you can focus on keeping your top and bottom lines strong.