For fast-growing brands, conversations around what is and isn’t a “good” retail profit margin can present a stream of loaded questions. Some say a 50% net profit is a great margin in e-commerce while others will swear that nothing less than 500% is worth your time.
The truth is, multiple factors play into what qualifies as a “healthy” profit margin for your brand, including some you may not always have full control over. Market conditions, inflation, and supply chain issues can all have an impact on your margins.
So how do you figure out what a good e-commerce profit margin is for you?
Let’s take a closer look at three key formulas to help you calculate your retail profit margin, plus some of the best ways to preserve your profits as you grow.
What Is a Good Retail Profit Margin for E-commerce?
- What Is Profit Margin?
- What’s a Good Net Profit Margin in E-Commerce?
- 3 Profit Margin Formulas to Consider
- 5 Ways to Optimize Your Profits As You Grow
- Skyrocket Your Profits With SellersFi
First, What Exactly Is Profit Margin?
Your profit margin is your profitability ratio. It shows what percentage of your overall e-commerce sales have become actual profit.
For example, a margin of 70% means that 70 cents of every dollar are profit. The remaining 30 cents cover operational costs like manufacturing, shipping, or anything else you have to pay for in order to manufacture, market, and deliver your product.
There are three main types of profit margins:
- Gross profit margin
- Operating profit margin
- Net profit margin
We’ll cover all three types in more detail, but when e-commerce brands discuss their profit margins, they’re often referring to their net profit margin.
What’s a Good Net Profit Margin in E-Commerce? Start by Setting Some Benchmarks
According to Shopify, the average e-commerce profit margin is 10%. A high profit margin would be around 20%, while 5% is usually considered low.
Of course, the average profit margin can also differ greatly based on your industry and business model, including your:
- Sales velocity
- Brand reputation
- Marketing and pay-per-click (PPC) expenditures
- Sourcing costs
- Storage costs
- Marketplace fees
- And more
As we’ve established, profit margins aren’t a one-size-fits-all affair. Different industries have different definitions of what an optimal profit margin is.
For example, a 5% net profit margin might be considered excellent in a specific food or beverage niche but dismal in the category of health and nutrition.
Similarly, if you sell a high volume of low-ticket items, you might be doing just fine on lower margins. On the other hand, if you sell high-ticket items at a lower velocity, you may need to make a higher margin on each sale.
While having a higher profit margin than the next store doesn’t necessarily mean you’re more profitable in terms of hard dividends, there are some general figures for good and bad profit margins that can help set a range to benchmark against as you grow.
3 Profit Margin Formulas to Consider
We hate to play the “it depends” card again, but the specific type of profit margin to use in your store is another one that boils down to the market economics of the niche you’re in and how your retail business is structured.
Obviously, higher is generally seen as better. But once you know the type of margin you’re looking at, you can decide what a healthy target percentage will look like for your unique position in the market.
To get started, let’s circle back to the three major types of profit margins.
Each retail profit margin formula offers a different perspective on your brand’s health and operational efficiency. Combined, these three formulas can provide comprehensive insights into your business’s strengths and weaknesses.
1. Gross Profit Margin
The gross profit margin is what’s left after you deduct all costs associated directly with production and may also include labor and raw materials. Combined, these are typically known as your Cost of Goods Sold (CoGS).
You can calculate it using this formula:
(Gross Profits ÷ Net Sales) X 100
Gross Profit = Revenue – CoGS
Net Sales = Revenue – (Discounts, Allowances, and Cost of Sales Returns)
For example, if your gross profit was $10,000 and your net sales were $50,000, the formula would be:
(10,000/50,000) x 100 = 20
In this scenario, your gross profit is 20%.
2. Operating Profit Margin
The operating profit margin is what you get after deducting operation, selling, and administrative expenses from the gross profit figure. It’s a crucial metric for how much profit your store makes after subtracting all variable production costs.
Here’s how to calculate your operating profit margin:
Operating Profit Margin = (Operating Income ÷ Revenue) x 100
For example, if your operating income is $85,000 and your revenue is $150,000, then the formula would be:
(85,000/150,000) x 100 = 56.66
In this scenario, your operating profit margin is 56.66%.
3. Net Profit Margin
Net profit margin is often the most significant measure of profitability.
To calculate it, deduct all expenses from the total revenue. Then divide the result by the total revenue and multiply by 100.
Here’s the formula to calculate your net profit margin:
Net Profit Margin = (Net Profit ÷ Total Revenue) x 100
Net profit = Total revenue – (CoGS + Taxes + Depreciation costs + Administrative Costs + Interest expenses + Allowances + Discounts + All other expenses)
For example, if your monthly net profit was $35,000 and your total revenue was $100,000, it would look something like this:
(35,000/100,000) x 100 = 75
In this scenario, your net profit margin is 35%.
5 Ways to Optimize Your Retail Profits as You Grow
While increased revenue is a good sign your business is on the right track, many growing brands tend to focus on revenue as the core metric for growth while overlooking their profit margins.
But even if increased revenue is your core focus, your net profit margin can still help you determine your store’s overall financial health by providing insight into how well you’re containing your overhead and operating costs.
Once you know the range of margin that makes sense for you, you can work to position your store to consistently hit that number. Of course, external market forces can sometimes make this feel out of your control.
Here are some strategies you can use to protect, or even increase, your margins as your business grows.
1. Strengthen Your Inventory Acquisition
Cost control is one of the most straightforward ways to optimize profits. For most e-commerce businesses, that starts with improving your inventory strategy.
Excess inventory, high manufacturing costs, and increased shipping expenses are just some of the inventory-related challenges that can quickly eat into your profit margin.
The good news is, with a little strategic planning, there are many different ways to reduce your inventory costs and overhead.
Here are some options you can consider to make your inventory operations more cost-effective:
- Refine your demand forecasting so you know exactly how much to order and when
- Negotiate supplier terms with existing partners to secure better rates
- Diversify your supplier base to include local partners and lower your shipping costs
- Purchase a local warehouse or work with other sellers to establish a more localized storage network
- Analyze your product catalog to maximize sales velocity on your highest-margin SKUs
- Explore new fulfillment options to see which are the most cost-effective long term
Not all of these options will work for all sellers, but with constant changes in the global supply chain, it doesn’t hurt to know your options.
Whichever route you choose, there may be some upfront costs that put a burden on your cash flow. Create an inventory funding strategy to help ensure you’re prepared to execute these cost efficiencies, whether that means exploring an invoice factoring solution to finance a large order with a new supplier or securing a flexible line of credit to secure the right amount of inventory at the right time.
With a clear plan for funding your improved inventory strategy in the early stages, you’ll be better positioned to increase your profit margins long term.
2. Replace Underperforming SKUs with New Products
To maximize your profit margins, you’ll need to be realistic about how each and every SKU is performing.
Consider replacing obsolete or slow-moving products that could be taking up costly warehouse space with well-researched new products that are sure to win profitable sales.
Here are some early actions to take to make sure your new product launches are profitable:
- Create consumer focus groups to ask customers what products they want to see from your brand.
- Put any excess inventory or slow-moving products on clearance to clear your overstock and recoup sales and cash flow.
- Use working capital to invest in testing and developing new products.
- Create a high-impact marketing campaign for a successful launch.
Poorly planned products are a common profit-drainer. By going straight to the source — that is, your customers — with a data-driven approach to researching and developing profitable new products for your brand, you can improve your margins on each and every item in your store.
3. Execute a Profitable Cross-Border Expansion
Sellers in multiple territories have an average growth rate that is 35.7 % higher than sellers in only one market. Expanding your brand into new territories adds profit capacity by giving you access to a broader pool of shoppers.
For example, if you’re already seeing profitable growth on Amazon US, you might decide to start selling on Amazon UK to capture more sales.
But be warned, launching your brand in a completely new territory can be a costly undertaking.
Here are some important steps to take to make sure your expansion strategy remains profitable:
- Run a feasibility study to measure the demand for your product in the potential new market.
- Check if your product can be sourced within the new market to save you additional sourcing and shipping costs.
- Learn the basics of tax requirements in each country in your new market.
- Optimize your product descriptions, website copy, product images, and marketing materials according to the different languages in your new market.
- Understand the complexities of selling in the new market, such as cultural barriers, regulations, exchange fees, and compliance regulations.
The best advice is always going to come from an expert tax, legal, and accounting firm in your area of focus. For example, companies like AVASK can help you plan a profitable global e-commerce expansion, with experts on everything from international taxation, accountancy, and more.
While it can feel like a lot at first, cross-border expansion doesn’t have to slow your current growth.
Flexible funding can help you make the leap into a new market, even when you have other initiatives underway. It’s how brands like Icelandic Glacial Water expanded into thirteen new markets around the globe during a major capital funding raise.
4. Launch into a New Sales Channel
Just as launching into a new geographical market can present a host of profitable new opportunities for your brand, expanding to embrace a multi- or even omnichannel approach can be a great way to scale.
Here are some of the ways flexible e-commerce funding can help you connect with shoppers in a new sales channel:
- Use data-driven technologies to identify profitable audience segments.
- Research the sales channels they’re already using and design a strategy to reach them there.
- Launch targeted campaigns to build awareness in the right shopper communities and marketplaces.
For some brands, this could even mean taking your DTC brand into the world of brick-and-mortar, or vice versa.
For sports brand CROSSNET, obtaining enough capital to fulfill the largest wholesale order in brand history meant that their popular volleyball-meets-four-square game would now be available in Sam’s Club stores across the US.
In other cases, high-street retail brands like Cath Kidston used strategic funding to rapidly adjust to market demands and quickly launch a digital-first offering securing 85% global sales as a result.
Whatever your channel expansion strategy, make sure you’ve got the data and the funding to set your brand up to win.
5. Scale Your Marketing Efforts
In the game of e-commerce, better marketing almost always equals better profits. But there is an art and science required for getting it right.
These days, there is no shortage of marketing channels here to help you increase your profits. Start with a data-driven approach by examining the existing channels that bring you the most ROI, then double your efforts.
For example, scaling your e-commerce marketing could include:
- Hiring an SEO expert to optimize your website and improve your rankings on popular product pages
- Increasing your PPC campaigns on platforms like Google Ads and Facebook
- Boosting influencer marketing strategy to include more conversion opportunities via Amazon Storefronts and Like to Know lists
- Partnering with other brands for live shopping collaborations via Amazon Live
- Getting creative with product bundles to increase average order value
- Launching subscription boxes for consistent revenue and deeper customer data
While experimentation is a key part of optimizing your e-commerce ROI, you’ll want to start by examining your past successes before deciding which channels to invest more into.
Skyrocket Your Profits With SellersFi
At SellersFi, we’re changing the way brands scale by providing fast, flexible e-commerce funding solutions purpose-built for every growth scenario.
Our dynamic funding solutions are fair, and flexible and won’t kill your profit margins with high-interest rates. Working Capital and Daily Advance funding can help growing brands bridge the cash flow gaps that often stand in the way of profitable growth, helping you grow on your terms.
To find out how much funding you can access, register here to learn more.