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.