Welcome to the exciting world of eCommerce businesses! While it’s an adventure filled with limitless possibilities, it’s also a journey full of challenges, and one of them is calculating your profit margins. It’s like trying to find a needle in a haystack with so much scattered data from various platforms, channels, and payment gateways. Revenue growth doesn’t inherently mean profitable growth.

But don’t worry, with a bit of patience and perseverance, you can master the art of calculating your margins. And it’s worth the effort because profit margins are the lifeblood of your business. Knowing your margins and general unit economics helps you make informed decisions about pricing, product offerings, and marketing strategies, and ultimately keeps your business thriving and profitable. So, let’s dive into this topic and uncover the mysteries of profit margins in ecommerce.

Measuring the success of a business can be done in various ways, with two popular metrics being net profit margin and operating profit margin. Net profit margin measures the total profit earned from revenue while operating profit margin indicates a business’s overall efficiency. Gross profit plays a significant role in determining the net profit margin as it represents the profit earned after deducting the cost of goods sold from revenue. 

Revenue is almost a vanity metric as it leaves out the costs of actually running the business — think shipping, customer acquisition costs, and operations. Meaning, it doesn’t indicate whether your business actually makes money – which is the important part!

Understanding the Various Types of Profit Margins for Your E-commerce Store

When evaluating the income of your e-commerce store, it’s important to understand the three primary metrics used: net profit margin, gross profit margin, and operating profit margin. Each metric offers unique insights into your business’s performance.

Net Profit Margin

Net profit is the amount of money a company has left over after subtracting all expenses from total revenue. Total revenue refers to the total amount of money a company generates from sales, services, or other sources of revenue. The net profit margin provides an indication of a company’s overall profitability and its ability to generate profits from its operations. The higher the net profit margin, the more profitable the company is considered to be.

Net Profit Margin = (Net Profit / Total Revenue) x 100

Gross Profit Margin

Gross profit margin is a metric that measures the profitability of a company by calculating the percentage of revenue that remains after deducting the cost of goods sold (COGS) from total revenue. Gross profit margin indicates how much profit a company generates from each euro of revenue before deducting operating expenses such as salaries, rent, and utilities. A high gross profit margin indicates that a company is efficiently managing its production and sales process, while a low margin may suggest that a company’s cost of production is too high relative to its revenue.

Gross Profit Margin = (Total Revenue – Cost of Goods Sold) / Total Revenue x 100

Operating Profit Margin

The operating profit margin represents the percentage of revenue a company earns after deducting its operating expenses but before interest and taxes. The operating profit margin indicates the profit a company generates from each euro of revenue after deducting its operating expenses. A higher operating profit margin means that a company is more efficient at managing its expenses and generating profits from its operations. A lower margin may suggest that the company’s operating costs are too high relative to its revenue.

Operating Profit Margin = (Operating Profit / Total Revenue) x 100

 

What is a good operating profit margin for your business?

The definition of a good profit margin varies depending on the industry and the size of the business. Generally, a higher profit margin is better, as it indicates that the business is effectively managing its costs and generating more profit per dollar of revenue.

General guidelines for a good profit margin relative to different industries according to Shopify:

“As a general rule of thumb, a 10% net profit margin is deemed average, while a 20% margin is deemed high and 5% low. If you want to compare your company’s performance based on profit and merchandise margins, check out the average profit margin for your industry.”

Remember, these are just guidelines, and profit margins can vary depending on various factors such as competition, economic conditions, and changes in customer demand.

 

E-Commerce profit margins

E-commerce businesses typically have lower overhead costs than traditional brick-and-mortar businesses. However, they may face higher and ever increasing marketing and advertising costs to attract and retain customers. As a result, profit margins in the e-commerce industry can range from 5% to 30%. A good profit margin for an e-commerce business can vary depending on several factors, including the industry, the size of the business, and the business model. However, as a general guideline, an e-commerce business should aim for a net profit margin of 10% or higher.

Analyzing profitability for your e-commerce business

It’s essential to compare your profit margins to similar e-commerce businesses in your industry to determine how well your business is performing. Additionally, tracking your profit margins over time and identifying trends can help you make informed decisions to improve your profitability and ensure your long-term success. 

An e-commerce business owner can keep track of their profit margins by doing the following:

• Figure out how much profit they make from their sales after paying for all expenses.
• Keep track of all their sales and expenses in detail.
• Look at which products or categories are making the most profit.
• Use software to help them keep track of their finances.
• Regularly check and adjust their prices and expenses to keep their profit margins healthy.
• Merchandise their store accordingly to display high-margin products.

Introduction 

Scaling an ecommerce business can be a complex journey filled with unique challenges. Gary, the owner of a Dublin-based women’s apparel brand, experienced firsthand the obstacles of scaling his business since its inception in 2020. As Gary’s business flourished, he found himself grappling with maintaining a high return on ad spend (ROAS) and making data-driven decisions to continue growing his business. 

Like many ecommerce businesses, the cost of advertising on Facebook and Google had become much more expensive, making it increasingly difficult for Gary to make a profit. He wanted to focus on running his business without constantly worrying about changing algorithms from Facebook and Google. Gary frequently came across the importance of being data-driven in the online world, but as he was focused on running the business, he didn’t have the expertise or the time to dive in and truly understand the data. 

Running an ecommerce company today means navigating 10+ platforms that are all working for the same business but are operating in siloes. Gary found it difficult to get a single source of truth from these platforms. This challenge was compounded by the fact that he didn’t have the resources to hire a data analyst, and he admitted that he was mainly making decisions based on gut feeling rather than data. For financial advice, Gary relied on his accountant, who unfortunately lacked expertise in ecommerce, resulting in a limited understanding of key ecommerce and marketing metrics. This oversight turned out to be a significant problem in retrospect. 

In January 2023, Gary turned to StoreHero, a powerful tool specifically designed for ecommerce companies. Over the course of our collaboration, Gary not only gained a comprehensive understanding of his business’s unit economics but also experienced phenomenal growth, increasing his net profit by 324% and sales by 39% compared to March 2022. This case study delves into the challenges Gary faced throughout his ecommerce journey, the transformative solutions StoreHero provided, and the valuable insights he gained to propel his business to new heights.

The Challenge 

Gary’s women’s apparel brand had been operating since 2020, selling directly to consumers through their online store. During 2020-2021, the business experienced impressive returns on their advertising investments. However, they faced challenges in maintaining the same ROAS and grew increasingly hesitant to increase their digital advertising budget. Gary primarily relied on Facebook & Google ads for customer acquisition, yet, like many other ecommerce brands, his understanding of the unit economics contributing to its success remained unclear. 

The Solution: StoreHero Integration 

Upon integrating Gary’s business with StoreHero, we discovered that while he had achieved a remarkable ROAS of over 10x during the Covid period, it had now dwindled to around 4.5x to 5x on a weekly basis. Consequently, the business began to reduce their paid advertising, concerned that the diminishing returns on ad spend would render their marketing efforts unprofitable.

However, when Gary studied the product section in StoreHero, he discovered that the break-even point (BEP) ROAS for their top two sellers was merely 1.64x. Despite the decline in ROAS from 10x to 5x, cutting back on ad spend inadvertently led to a decrease in the number of profitable customers visiting the store. 

 

Overcoming Hesitation: Boosting the Advertising Budget 

In March 2023, Gary decided to take a bold step and more than doubled his advertising budget, resulting in a 117% increase in ad spend compared to the previous year. The impact on the business was outstanding! He spent €7,571 on advertising, generated €76,541 in sales (a 39% increase), and saw the net profit soar to €7,325, marking an impressive 324% growth. 

The Key to Success: Consolidating Data and Gaining Insights 

StoreHero’s ability to consolidate data from multiple sources provided Gary with valuable insights into his business. Gary utilised the insights and recommendations section in StoreHero to quickly understand his ad performance and make changes to his paid marketing setup accordingly. Prior to using StoreHero, Gary was often overwhelmed by the various ad manager platforms. StoreHero explained to him in plain English what was working and what could be improved, simplifying the process and making it much more manageable. With this newfound clarity, Gary was able to make data-driven decisions that optimized his ad campaigns, driving better results for his business.

One of the most alarming discoveries was the amount of discounts he was giving out relative to his bottom line. Upon examining the finance page on StoreHero, Gary realized the negative impact of his discounting strategy. Consequently, he discontinued the Welcome10 discount offered upon email signup. While this led to a slight decrease in email signups, it had a minimal impact on the conversion rate. Yet, the impact on the bottom line was huge.

In March 2022, the value of discounts surpassed the company’s net profit, with discounts making up 2.78% of total sales. However, by March 2023, the discounts accounted for only 0.55% of the total sales, showcasing a significant improvement. This strategic decision, backed by data from StoreHero, allowed Gary to maintain a healthy bottom line while continuing to grow his business.

Efficient Use of Resources: Understanding Operational Expenses and Labour Costs 

Although the increased advertising budget led to a slight decrease in ROAS, the higher sales volume ultimately improved the efficiency of the business’s operational expenses. StoreHero allowed Gary to enter all of his operational expense data, which amounted to €15,979 per month and included staff salaries, rent, software, and agency fees. By boosting the sales volume, Gary was able to maximize the value of these expenses and enhance overall business efficiency. 

In fact, the increased ad spend not only increased sales but also made the fixed operational expenses of labour and rent much more efficient. Labour as a percentage of sales improved by a staggering 28%, which in turn meant that the business was operating on a much leaner basis and therefore generated more profits. 

Gary had never considered analysing labour costs as a percentage of sales, but StoreHero enabled him to do so, leading to better decisions regarding workforce planning. He admits that previously, there was no clear strategy for determining the number of staff needed to fulfill orders. Fortunately, as the business continues to grow, monitoring labour costs as a percentage of sales has provided Gary with a metric to evaluate labour efficiency. This insight allows him to plan effectively for hiring additional staff, ensuring that the business maintains its upward trajectory & profitability as it enters the busy season later this year.

Conclusion 

In conclusion, Gary’s ecommerce business faced difficulties in maintaining a high ROAS and making well-informed decisions due to a lack of clarity of his unit economics, which was exacerbated by relying on an accountant who was not well-versed in ecommerce and its unique reliance on paid marketing. StoreHero provided the comprehensive platform he needed to consolidate his e-commerce, marketing, and finance data, enabling him to make data-driven decisions and effectively scale his ad spend. By leveraging StoreHero, Gary was able to more than double his advertising budget and achieve a massive 324% growth in net profit, along with a 39% increase in sales. 

StoreHero’s ability to integrate various aspects of an ecommerce business into a single, platform allows for a holistic understanding of the relationship between ad spend, sales volume, operational expenses and ultimately net profit. This bird’s-eye view of the business not only benefits individual store owners like Gary but also has the potential to revolutionise the way ecommerce companies approach marketing and decision-making. 

As a result of using StoreHero, Gary has gained newfound confidence in managing his marketing budgets and making informed decisions about his business’s growth. He now has the tools and knowledge necessary to ensure that his marketing efforts are strategic and focused on driving profitability and growth. 

Ecommerce businesses looking to gain control over their decision-making process, enhance net profit, and drive growth can greatly benefit from StoreHero’s comprehensive platform. 

Don’t miss the opportunity to revolutionise your business – explore StoreHero today and unlock your ecommerce potential.