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.
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:
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.
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:
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.
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.
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
Where:
Gross Profit = Revenue – CoGS
And:
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%.
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%.
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
Where:
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%.
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.
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:
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.
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:
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.
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:
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.
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:
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.
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:
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.
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 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.
