Profit margins are one of the most important aspects of running a successful online store. By understanding and manipulating your ecommerce profit margins, you can ensure that your business is making as much money as possible.
This article will discuss what ecommerce profit margins are, how to calculate them, and the factors that can affect them.
We will also provide a few tips for increasing your ecommerce profit margin.
What Are eCommerce Profit Margins?
eCommerce profit margins are the percentage of revenue that a business earns after deducting various expenses.
Or, to put it more simply, it’s the difference between what you pay for a product, and what your customer pays.
Keep reading as we go deeper into profit margins, provide some tips to boosting them, and finally answer the question “What is a good profit margin for ecommerce?”
Different Types Of Profit Margins
Margins ultimately represent the money you make, but they’re not all indicative of pure profit.
There are actually different types. Each one differs in terms of what it includes.
Let’s take a look at them.
Gross Profit Margin
This is the most basic margin. The gross profit margin is the percentage of total revenue left over after deducting the cost of goods sold (COGS) from sales. It's calculated by dividing gross profit by net sales*.
To work out the average retail profit margin, the formula will look like this:
Total revenue minus cost of goods divided by total revenue equals gross profit
Or
[Total revenue - cost of goods) / total revenue = gross profit]
*While gross profit is the difference between revenue and cost of goods sold, while net sales is the total revenue minus returns and discounts.
Operating Profit Margin
Operating profit margin is the percentage of total revenue left over after deducting all operating expenses from sales, not just the cost of goods. It's calculated by dividing operating profit by net sales.
Operating expenses that will affect your profit margin target include the cost of goods sold, selling, general and administrative expenses, and depreciation and amortization. This metric is used to measure a company's overall profitability.
In order to work it out, take the formula above, but instead of the cost of goods, include all direct expenses incurred, such as labor, utilities, shipping and rent etc.
Net Profit Margin
Net profit margins go a step further, and are the percentage of total revenue left over after deducting all expenses from sales. It's calculated by dividing net profit by net sales.
Expenses include things like cost of goods sold, selling, general and administrative expenses, interest expense, taxes, and depreciation and amortization.
This metric is used to measure your overall ecommerce profitability.
Again, you take the formula, and instead of cost of goods include absolutely all expenses, including taxes and interest.
That will then give you your net profit margin, which is also known as a “bottom line”. The pure profit.
How To Improve Your Profit Margin
The profit margin is a key metric for any business, but it's especially important for ecommerce businesses. That's because the margins in ecommerce are often very thin, so even a small increase in profits can have a big impact on the bottom line.
Unfortunately, there’s no neat “hack” that’ll skyrocket your margin overnight and ecommerce profit. Instead, it’ll take a focused effort on your part to increase it bit by bit.
In essence, it’s about increasing sales, and cutting costs, so that you can increase your profit.
Here are a few things that you can do to improve your profit margins:
1. Offer Discounts and Coupons
Discounts and coupons are a great way to entice customers to buy from you. They can also help you clear out inventory that's not selling well.
Conditional coupons are a good idea i.e. buy two get one free, spend $20 get 10% off etc. They can help reach a good profit margin for retail.
With conditional coupons, you can estimate what you’ll be making on each deal, because the conditions of the discounts are highly specific, and require the customer to spend a minimum amount.
2. Improve Your Product Photography
Product photography is important for two reasons.
First, it helps customers see what they're buying.
Second, it helps you show off your products in the best light, which can lead to more sales.
You can get even more creative and make use of 3D modeling to use augmented reality (AR) to show off products. This is a rising trend in e-commerce, which makes use of the AR tech built into most new smartphones.
3. Use Social Media to Your Advantage
Increase your ecommerce margins through social media. It’s an excellent way to promote your products and build brand awareness. It's also a great way to connect with customers and get feedback about your products.
Through the use of landing pages, you can set up exclusive offers to entice social media users, and boosts your ROI.
4. Streamline Your Shipping
Shipping is one of the biggest expenses for ecommerce businesses. You can save a lot of money by streamlining your shipping process and using cheaper shipping methods.
Consider looking into dropshipping, which cuts out a lot of the time, and labor sellers wich otherwise have to take care of. This alone can improve the average profit margin for online retailers.
5. Offer Free Shipping
Free shipping is a great way to encourage customers to buy from you. It's also a great way to build customer loyalty.
Don’t offer free shipping across the board, however. Like the discounts, you’ll want to make free shipping conditional.
For example, offer free shipping if a customer spends more than $50 dollars.
You can even lower that threshold during periods you notice a natural dip in sales to make up a shortfall.
6. Consider High Margin Products
Luxury items are the most common high-margin products to sell: Handbags, jewelry, high-end fashion, and so on. Consider basing your business on this is you can get a bulk price on them.
Alternatively, you could target a niche market in another region that lacks something you have access to.
Typical Retail Margins
Now that you know what profit margins are and a few ways to boost them, what are the profit margins of other businesses? It helps to have a measuring stick, after all.
There isn’t a simple answer. It’s highly dependent on the particular area of commerce, and the specific business.
One business might have nearly no overheads, so they end up with a profit margin of over 30%. Another might have a slim margin of 7%, but, by doing business on a grand scale, make a significant profit in reality.
The general range is between 5% and 20%, with 5% being low (but workable) and 20% being high.
This is the net margin. Gross margins are much more significant.
What is a Good Profit Margin for eCommerce?
A study analyzed by AcquireConvert indicates that the average gross profit margin for ecommerce is 42.53%, while the net margin or bottom line is 4.95%.
Ultimately it’ll come down to what works for your business. You’ll need to take a complete account of your expenses to arrive at a final margin.
Once you have that margin, you can start finding ways to manipulate it or even use it to stay competitive in ecommerce.
If you want an idea of what certain markups will mean for your gross margin, you play around with this handy Shopify margin calculator
Wrap Up
There you have an introduction to ecommerce profit margins, their various formulas, and tips on how to improve them.
Margins may seem tricky to handle at first, but once you have them in focus, they’re an invaluable tool for fine-tuning your approach to your ecommerce business.
Garan is a writer interested in how tech reshapes the environment, and how the environment reshapes tech. You'll usually find him inoculating against future shock and arguing with bots.
