In the fast-moving world of ecommerce, understanding your numbers isn’t just a smart move—it’s essential. While many businesses focus on growing revenue, real success comes from what you actually keep after covering costs. That’s where gross profit margin comes into play. It’s a key metric that reveals how efficiently your business is producing profit from sales.
This guide breaks down what gross profit margin is, why it matters, how to calculate it, and how to improve it to build a thriving ecommerce business.
What is gross profit margin?
Gross profit margin is a financial metric that shows how much money your business makes from selling products after subtracting the cost of goods sold (COGS). It’s usually expressed as a percentage of your total revenue.
Here’s the basic formula:
Gross Profit Margin (%) = [(Revenue – COGS) / Revenue] x 100
Let’s say you run an online store that sells backpacks. You sell one backpack for $100, and it costs you $60 to produce or purchase it. Your gross profit is $40. Your gross profit margin would be:
[(100 – 60) / 100] x 100 = 40%
That means for every dollar you make in sales, you keep 40 cents after paying for the product.
Why does gross profit margin matter?
Tracking gross profit margin helps you understand how profitable your products are before factoring in other expenses like marketing, shipping, rent, or software tools.
Here’s why this number is so important:
1. It shows product profitability
Gross profit margin helps you identify which products or categories are your best performers. A higher margin means you’re keeping more from each sale, while a low margin may indicate the product is too expensive to produce or not priced high enough.
2. It guides pricing strategy
If your margin is too low, it might be time to raise prices or reduce costs. On the other hand, if your margin is healthy, you may have room to offer discounts, bundle deals, or free shipping without hurting your bottom line.
3. It helps control costs
Monitoring this metric over time can reveal changes in supplier pricing or operational inefficiencies that may be eating into profits.
4. It supports growth decisions
Knowing your gross profit margin helps you plan for expansion, new inventory, or marketing investments. If your margin is strong, you can afford to scale confidently.
Understanding Cost of Goods Sold (COGSS)
To calculate gross profit margin accurately, you need a clear grasp of what goes into your cost of goods sold.
COGS includes the direct costs of producing or purchasing your products. This might include:
- Product manufacturing or wholesale costs
- Packaging materials
- Shipping from supplier to warehouse
- Customs or import duties (for international sourcing)
- Production labor (if you create your own goods)
COGS does not include:
- Advertising or marketing costs
- Warehouse rent
- Website hosting or software tools
- Salaries of customer service or admin staff
Getting COGS right is crucial. Underestimating it inflates your profit margin, which can lead to poor decisions.
What is a good gross profit margin in ecommerce?
There’s no universal number, but a healthy gross profit margin in ecommerce typically falls between 30% and 60%. However, this can vary depending on the product category:
- Fashion and accessories: 50–70%
- Beauty products: 60–80%
- Electronics: 10–30%
- Home goods: 30–50%
- Supplements and consumables: 40–70%
If your margins are below industry benchmarks, it doesn’t necessarily mean failure. Some stores thrive on high-volume, low-margin models. What matters most is that your margin supports your overall business goals.
How to calculate gross profit margin
Let’s walk through a quick example to see how it works.
Suppose your ecommerce store has the following monthly numbers:
- Revenue: $100,000
- COGS: $60,000
Gross profit = $100,000 – $60,000 = $40,000
Gross profit margin = ($40,000 / $100,000) x 100 = 40%
This means you’re keeping 40 cents from every dollar in revenue after covering your product costs.
5 ways to improve gross profit margin
Increasing gross profit margin is one of the most effective ways to build a more profitable and sustainable business. Here are strategies to help you boost yours:
1. Raise your prices
This is the most direct way to improve your margin. Even a small increase can have a big impact. Just make sure your pricing still aligns with customer expectations and perceived value.
Tip: Test different pricing strategies using A/B testing or limited-time offers to see how your audience responds.
2. Lower your cost of goods sold
Find ways to reduce the cost of sourcing or manufacturing your products:
- Negotiate with suppliers for better deals
- Buy in larger quantities to unlock bulk discounts
- Switch to alternative suppliers or materials
- Streamline packaging and logistics
Just be careful not to sacrifice product quality—long-term success depends on customer satisfaction.
3. Focus on high-margin products
Identify and promote the products that give you the highest return. Use upsells and bundles to increase average order value using items with strong margins.
For example, if you sell skincare products, a $25 face cream with a 70% margin is more profitable than a $100 gadget with a 15% margin.
4. Streamline operations
While operating costs don’t directly affect gross profit margin, inefficiencies in product handling, fulfillment, or returns can raise your COGS if you’re not careful. Automate tasks, optimize your inventory, and reduce unnecessary shipping costs where possible.
5. Introduce private label or custom products
Instead of reselling products from other brands, develop your own line. Private label products often carry much higher margins because you control the production and branding.
This approach also gives you a unique edge in a competitive marketplace.
Gross profit margin vs. net profit margin
It’s important not to confuse gross profit margin with net profit margin.
- Gross profit margin looks at profits before overhead, taxes, and operating expenses.
- Net profit margin considers everything—including salaries, marketing, rent, and other fixed or variable costs.
Think of gross profit margin as a zoomed-in view of your product profitability, while net profit margin is the big-picture health check of your entire business.
For example:
- Gross profit margin: 50%
- Net profit margin: 10%
This means you’re earning half of each sale before operating costs, and keeping 10% overall after all expenses are paid.
Summary
In summary, Gross Profit Margin in ecommerce is the percentage of revenue a business keeps after subtracting the cost of goods sold, showing how profitable its products are before operating expenses.