What ‘Net Sales’ really means and why profit can still be low

Brief Summary:

Net sales are actual total revenue generated by a company or business organization, after substrating any sales returns, allowances, and discounts from its gross sales.

Gross sales simply means the total value of all sales a business makes within a specific period before removing anything.

A business can record high net sales and still have low profit for many reasons, and all of them happen after net sales have already been calculated.

Net sales are calculated after removing sales-related deductions only such as discounts, returns, and refunds. However, net sales do NOT remove operating and business expenses.

Many companies record low profit even when net sales look strong. This often happens because they operate on thin margins to keep prices low and attract more customers—a strategy Costco has used for decades to grow its customer base and strengthen its membership business.

Costco does not make most of its profit by heavily marking up product prices. This is why the world’s third-largest retailer by sales can record very high net sales in 2025 yet still show relatively low profit after paying expenses such as product costs, staff salaries, rent, logistics, marketing, and taxes. Instead, Costco earns a significant portion of its profit from annual membership fees.

So yes, it's not every company that recorded high net sales in its Annual General Meeting (AGM) that actually earned good revenue. A business can record high net sales and still have low profit for many reasons, and all of them happen after net sales have already been calculated.

Why businesses can have high net sales but low profit

Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS) is the direct cost of producing the goods a company sells, including raw materials, direct labor, and manufacturing overhead. It is calculated as Beginning Inventory + Purchases − Ending Inventory. COGS appears on the income statement to determine gross profit by subtracting it from revenue, and it excludes indirect costs like marketing or administrative salaries, which do not affect net sales but impact operating profit and net profit.

For example, if a company sells $1 billion worth of goods but spends $850 million to buy or produce those goods, only a small amount is left before any other expenses are paid. Businesses like supermarkets and wholesale retailers often face this problem because they sell large volumes at very low margins.

Thin Profit Margins

Thin profit margins mean a business keeps only a small percentage of revenue as profit. This is common in high-volume industries like groceries, airlines, or construction. Companies operating with thin margins often rely on high sales, strict cost control, and operational efficiency to survive. While this approach offers less financial cushion, it enforces strategic discipline, and small, agile businesses can sometimes thrive by focusing on high impact per dollar earned rather than sheer scale.

Some businesses also intentionally keep prices very low to attract customers, outcompete rivals, and grow market share. This strategy boosts sales volume but leaves very little profit per item sold. Even when multiplied across millions of sales, the total profit may still appear small compared to the net sales recorded, highlighting the challenges of operating with thin margins.

High Operating Expenses

High operating expenses (OpEx) mean a business spends a lot on daily running costs like rent, salaries, utilities, technology costs, security, insurance, marketing, and administration, which directly cuts into profits, potentially hurting growth or even causing failure. Even if sales are strong, running a large business is expensive, and these costs must be paid every month. Some businesses are managing OpEx by reviewing contracts, cutting waste, and balancing necessary spending with cost reduction.

Logistics and Distribution Costs

Logistics and distribution costs are the total expenses for moving products from origin to end customer, covering transportation, warehousing, inventory management, packaging, and order fulfillment. It acts as part of supply chain expenses, often 10% to 25% of sales, with transport and storage being the key drivers.

These costs can be broken down into fixed (such as rent and salaries) and variable (such as fuel and freight) expenses. These expenses are crucial for financial planning, profitability, and competitiveness, and they can be very profit-demanding, especially for companies that move goods across cities or countries with high fuel or infrastructure costs.

Marketing and Customer Acquisition Costs

Marketing and Customer Acquisition Costs (CAC) measure how much a business spends to acquire one new paying customer, including expenses such as advertising (digital and offline), sales activities, staff salaries, tools, customer rewards, and content creation. CAC is calculated by dividing total sales and marketing expenses by the number of new customers acquired.

Even though this metric is used to track efficiency and is often compared with Customer Lifetime Value (LTV) to ensure growth is profitable, businesses still spend heavily in this area to keep sales growing. These expenses help drive higher net sales, but they also reduce the final profit.

Technology and Infrastructure Investment

Many companies spend heavily on software, servers, cybersecurity, apps, websites, payment systems, and system maintenance. These expenses don’t reduce net sales, but they reduce profit.

Loan Interest and Debt Repayment

Loan interest is the cost of borrowing money, while debt repayment is the process of paying back the original borrowed amount (principal) plus that interest over a set period. If a business borrowed money to expand operations, the interest paid on those loans comes out of profit, not net sales.

Taxes and Government Charges

Taxes are compulsory financial contributions levied by a government to fund general public services and operations, and government charges (such as fees, levies, duties, and rates) are payments for specific services, privileges, or regulatory purposes. Corporate taxes, nonrecoverable VAT, levies, regulatory fees, and compliance costs are all paid after net sales are recorded.

Wastage, Losses, Theft, and Inefficiencies

Wastage, losses, theft, and inefficiencies are key contributors to "shrinkage," defined as the discrepancy between actual inventory and recorded inventory. These issues result in significant financial losses, strain on resources, increased operational costs, and negative environmental and societal impacts across various industries. In fact, expired goods, damaged products, employee theft, operational mistakes, or system inefficiencies all reduce what a company finally earns.

Reinvestment and Long-Term Strategy

Reinvestment and long-term strategy are also part of the factor influencing why the profit of a company is low despite reporting high net sales. They are fundamentally linked concepts in both business and personal finance that focus on deferring immediate gratification to foster sustained, exponential growth through the power of compounding.

Some companies choose to reinvest earnings into expansion, new stores, better pricing, or customer benefits instead of showing high profit. This makes the business stronger in the long run but keeps short-term profit low.

Final Notes

Cost of goods sold (COGS), thin profit margins, high operating expenses, logistics and distribution costs, marketing and customer acquisition costs, technology and infrastructure investment, loan interest and debt repayment, taxes and government charges, wastage, losses, theft, and inefficiencies, and reinvestment and long-term strategy are the major reasons a company's profit can be low even when net sales are high. It is important to note that net sales are calculated after removing sales-related deductions only, such as discounts, returns, and refunds, but they do not account for operating and business expenses, which is why high net sales do not automatically translate into high profit.