Understanding Different Types of Profits: Gross Profit, CM1, CM2, CM3, EBIDTA, PAT, PBT, Net Profit

Want help with understanding different profits in business? It's confusing to see so many types, Gross, CM1, CM2, EBITDA, PAT, and more! Here’s a simple, clear breakdown of what they mean and how to use them. Dive into this blog to learn more. 

What Does Profit Really Mean?

Profit is the money a business earns after covering its costs. It shows whether the business is doing well or not.

But profit isn’t just one number. There are different types, like Gross Profit, EBITDA, and Net Profit, each showing a different part of your financial story. Now, you must be wondering, what makes understanding different profits in business important?

Let’s say you’re preparing a pitch deck for investors. In this case, showcasing the right type of profit can make or break your funding chances. That’s why understanding different profits in business is extremely important! 

In this blog, we’ll explain each profit type clearly, what it means, why it matters, and how to calculate it.

Let’s break it down step by step.

What is Gross Profit

Gross Profit is the first level of profit that a company earns from its core operations. It represents the money left after subtracting the direct costs of producing goods or delivering services, known as Cost of Goods Sold (COGS), from the total revenue.

COGS typically includes costs like raw materials, direct labor, and manufacturing expenses.

Think of it this way: 

You sell a product for ₹1,000, and it costs you ₹600 to make it. The ₹400 left is your gross profit.

Purpose of Gross Profit

Gross Profit helps you assess your production efficiency and product-level profitability.  It doesn’t reflect your overall profitability, just how profitable your core operations are.

It tells you:

• Are you pricing your products right?
• Are your production or sourcing costs too high?
• Is your core business generating enough value?

How to Calculate Gross Profit

Formula: Gross Profit = Revenue – Cost of Goods Sold (COGS)

Where:

• Revenue is your total sales/income.
• COGS includes all direct costs tied to producing the goods or services sold.

What is Contribution Margin 1 (CM1)?

CM1 or Contribution Margin 1 shows how much revenue is left after subtracting variable costs directly tied to sales, such as COGS and selling expenses like delivery or packaging.

It reflects your profit per unit before fixed costs like rent or salaries are deducted.

Purpose of CM1

CM1 helps answer:

• Are your products generating enough margin after direct selling expenses?
• Can you sustain fixed expenses based on your per-unit profits?

This is especially useful for SaaS companies, D2C brands, or subscription-based businesses that have a mix of variable and fixed selling costs.

How to Calculate CM1

Formula: CM1 = Revenue – COGS – Variable Selling Expenses

What is Contribution Margin 2 (CM2)?

CM2 goes a step further by subtracting marketing and distribution costs from CM1. This includes ad spend, promotional costs, affiliate commissions, etc.

It shows the profitability after customer acquisition efforts.

Purpose of CM2

CM2 helps you assess:

• Are your marketing efforts generating a positive return?
• Do you have a profitable unit economics model?

It’s a key profit metric for growth-stage startups tracking customer acquisition cost (CAC) and return on ad spend (ROAS).

How to Calculate CM2

Formula: CM2 = CM1 – Marketing & Distribution Costs

What is Contribution Margin 3 (CM3)?

CM3 subtracts customer success, account management, and operational support costs from CM2. This gives a more refined look at how much is left to cover fixed operating expenses and eventually profit.

Purpose of CM3

CM3 is crucial to understand the true net contribution from each customer or product line. This helps in product-level profitability decisions and resource allocation.

How to Calculate CM3

CM3 = CM2 – Customer Support & Success Costs

What is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s a clean look at a company’s operating performance without non-operating expenses.

Purpose of EBITDA

It allows comparison across businesses by stripping out:

• Interest (financing decisions)
• Taxes (jurisdictional variations)
• Depreciation & amortization (non-cash)

Investors love it because it shows core operational health.

How to Calculate EBITDA

EBITDA = Operating Profit + Depreciation + Amortization

What is PBT (Profit Before Tax)?

PBT refers to the profit a company earns before deducting income taxes. It includes all operating and non-operating income, interest, and other gains/losses.

Purpose of PBT

It reflects total profitability before tax liabilities. It’s a great indicator of:

• How well the business is run overall
• The impact of debt and other income/expenses

How to Calculate PBT

PBT = Net Operating Profit + Other Income – Interest Expenses

What is PAT (Profit After Tax)?

PAT is the actual profit left after paying all taxes. This is also called the net earnings or bottom line.

Purpose of PAT

• PAT is the ultimate measure of profitability.
• It shows how much money is left for shareholders, reinvestment, or dividends.

How to Calculate PAT

PAT = PBT – Taxes

What is Net Profit?

Net Profit is often used interchangeably with PAT, but it can also include extraordinary items or one-time gains/losses.It’s the most comprehensive profit metric.

Purpose of Net Profit

It gives a full picture of profitability, including operational, financial, and exceptional income/expenses.It is used in key ratios like:

• Net Profit Margin
• Earnings Per Share (EPS)

How to Calculate Net Profit

Net Profit = Total Revenue – Total Expenses (including taxes, depreciation, interest, etc.)

Let’s look at the Summary

Gross Profit	Revenue – Cost of Goods Sold (COGS)
CM1	Revenue – COGS – Variable Selling Expenses
CM2	CM1 – Marketing & Distribution Costs
CM3	CM2 – Customer Support & Success Costs
EBITDA	Operating Profit + Depreciation + Amortization
PBT	Net Operating Profit + Other Income – Interest Expenses
PAT	PBT – Taxes
Net Profit	Total Revenue – Total Expenses (including taxes, depreciation, interest, etc.)

Conclusion

Each type of profit offers a unique insight, from production efficiency (Gross Profit) to final profitability (Net Profit).

Knowing how to calculate and use them can help you manage your business better, make smarter decisions, and improve performance.

Still wondering which metric matters most for your business? Our Virtual CFO services are here to guide you. Reach out to our financial experts and start understanding the different profits that drive real success.

FAQs

Q. How do you understand profit in financial terms?

Profit is the financial gain when revenue exceeds expenses. It can be viewed at different stages like gross, operational, or net, depending on what costs are deducted. Understanding profit helps assess business health.

Q. What is the difference between EBITDA and PAT?

EBITDA shows operational earnings before interest, tax, depreciation, and amortization. PAT, or Profit After Tax, reflects the final profit after all deductions, including taxes and financing costs.

Q. Is Contribution Margin 1 the same as Gross Profit?

No, CM1 includes additional variable selling costs like packaging or delivery, beyond just COGS. Gross Profit only deducts COGS from revenue.

Q. Why is understanding different profits important?

Each profit type gives insights into different parts of your business—from production efficiency to marketing impact. It helps in pricing, budgeting, and strategic planning.