If you already run a store, the textbook definition of operating expenses is the least useful part. What matters is which line your costs land on, and what that does to the profit you actually keep. This guide walks the income statement top to bottom with real operating numbers, so you can read your own.
Operating expenses, defined for an operator
Operating expenses (often called OPEX) are the costs you pay to keep the business running day to day, regardless of how many units you sold. They are the indirect, overhead-style costs: advertising, software subscriptions, payment processing, administrative tools, and salaries for anyone not making the product. (finquery.com)
On the income statement they live in a specific place: after gross profit, before operating income. That position is the whole point. Operating expenses are what separate "I made a margin on each sale" from "the business made money this month."
Operating expenses vs. COGS — where POD sellers draw the line
This is the distinction the generic accounting articles blur, and it is the one that trips up store owners. Cost of goods sold (COGS) is the direct cost of producing and delivering the specific units you sold. Operating expenses are everything else it takes to run the shop. (finquery.com)
For a print-on-demand store, the split is unusually clean:
- COGS (direct, scales with each order): the base price your supplier charges to print the item, plus the shipping you pay the supplier. If you need a refresher on calculating it, see how to find cost of goods sold using FIFO and recording cost of goods sold.
- Operating expenses (indirect, you pay them whether you sell or not): Meta and Google ad spend, your Shopify subscription, your email app, design software, and payment-processing fees.
The one that surprises people: your Meta and Google ad spend is an operating expense, not COGS. It is a selling cost, so it sits below gross profit. That placement is why a store can show a healthy gross margin and still lose money — the advertising lives one line down.
Where operating expenses sit on the income statement
The income statement runs in a fixed order, and each subtraction answers a different question:
- Revenue — what customers paid you.
- − COGS — the direct cost of the units sold.
- = Gross profit — what's left to cover everything else.
- − Operating expenses — the running costs of the business.
- = Operating income — profit from core operations. (finquery.com)
Gross profit minus operating expenses equals operating income. If you only ever look at gross margin, you are reading the statement at step 3 and stopping before the line that decides whether you have a business.
A worked example: a 340-order month
Say your store does 340 orders a month at a $31 average order value, and you spend $2,800 a month on Meta ads. Your supplier charges you about $14 per order all-in (base print cost plus the shipping you pay them). Here is the income statement for the month.
Revenue: 340 × $31 = $10,540 COGS: 340 × $14 = $4,760 Gross profit: $10,540 − $4,760 = $5,780
Now the operating expenses. Shopify's Basic plan runs about $39 a month (sherocommerce.com), and the rest are example figures for a store this size:
| Operating expense (monthly) | Amount |
|---|---|
| Meta ad spend | $2,800 |
| Payment processing fees | $340 |
| Email / SMS app | $60 |
| Shopify subscription | $39 |
| Other apps + design software | $50 |
| Total operating expenses | $3,289 |
Operating income: $5,780 − $3,289 = $2,491
So on $10,540 of revenue, this store keeps $2,491 in operating income — an operating margin of about 24% (2,491 ÷ 10,540). The gross margin looked like 55% ($5,780 ÷ $10,540). Operating expenses, led by that $2,800 of ad spend, ate more than half of it. That gap between 55% and 24% is the number operators actually live on.
The operating expense ratio — and what to watch
The operating expense ratio is operating expenses divided by revenue. (finquery.com) In the example above:
$3,289 ÷ $10,540 = 31.2%
That means roughly 31 cents of every revenue dollar went to running the store (not to making the product). For a POD store, this ratio is dominated by one input: ad spend. If your advertising creeps from $2,800 to $3,500 at the same revenue, the ratio jumps past 37% and your operating income drops by $700 — with nothing else on the statement changing.
Tracking the ratio month over month tells you whether you are scaling efficiently or just buying revenue. A rising operating expense ratio at flat revenue is the earliest warning that your paid acquisition is getting more expensive. For the cost side that isn't advertising, reducing inventory carrying costs and the broader ecommerce ops economics guide cover where the slower leaks hide.
The expenses that straddle the line
A few costs don't sit neatly in either bucket, and getting them wrong distorts both your gross margin and your operating income.
- Payment processing fees. Most sellers treat card-processing costs as an operating expense, since they are a cost of running the storefront rather than of producing the item.
- Chargeback fees. When a customer disputes a charge, Shopify Payments charges US merchants a $15 fee per chargeback (chargeback.io) — and for POD, the printed unit can't be restocked, so the COGS is gone too. That blended loss shows up partly in COGS and partly in operating expenses.
- Shipping. The shipping you pay your supplier to fulfill an order is part of COGS. Shipping-related software or insurance you buy to run the operation is an operating expense.
The precise placement matters less than consistency: pick a treatment, apply it every month, and your margin trend will be honest.
Why true per-order profit is the number underneath all of this
The income statement gives you the monthly picture. But operating expenses don't actually hit per order evenly — ad spend is lumpy, some orders cost more to acquire than others, and a refund or chargeback wipes out several orders' worth of margin at once. The store-level operating margin can look fine while a chunk of individual orders are underwater.
This is where PodVector AI comes in. Victor is an AI employee for POD sellers — not a dashboard — that connects your Shopify store, Meta Ads, Google Ads, your print provider (Printify, Printful, or Gelato), and Klaviyo, then computes true per-order profit by pulling product cost, fees, shipping, and ad spend into one number. Victor delivers the reports to your Google Drive, and every write action it takes is approval-gated — you approve before anything executes. That turns "my operating margin was 24% this month" into "these specific orders and campaigns are dragging it down."
Start with PodVector AI and let Victor compute your true per-order profit.
FAQs
Are operating expenses the same as operating costs?
Mostly, yes — the terms are used interchangeably for the recurring costs of running the business. Strictly, "operating costs" sometimes means COGS plus operating expenses together, while "operating expenses" refers to the indirect costs below gross profit. On the income statement, the operating-expenses line is the indirect bucket. (finquery.com)
Is advertising an operating expense or COGS?
Advertising is an operating expense. It is a selling cost, so it sits below gross profit on the income statement, not inside COGS. For most POD stores, paid ad spend is the single largest operating expense — which is exactly why a strong gross margin doesn't guarantee a profit.
Where do operating expenses appear on the income statement?
They appear after gross profit and before operating income. The order is: revenue, minus COGS equals gross profit, minus operating expenses equals operating income. (finquery.com)
Does cost of goods sold count as an operating expense?
No. COGS is the direct cost of producing the units you sold, and it is subtracted before gross profit. Operating expenses are the indirect costs subtracted after gross profit. Some broad definitions lump both under "operating costs," but on the statement they are separate lines. (finquery.com)
What's a good operating expense ratio for a POD store?
There's no universal number, because it depends almost entirely on how much you spend to acquire customers. The useful move is to track your own ratio month over month: a rising operating expense ratio at flat revenue means your paid acquisition is getting more expensive, and your operating income is quietly shrinking.
Why does my store show gross profit but no operating income?
Because your operating expenses — led by ad spend, plus subscriptions, app fees, and processing — are consuming the gross profit before it reaches the bottom of the statement. The gap between your gross margin and your operating margin is where the money goes. Reading both lines, not just gross margin, is the fix.