Ecommerce Profit Margin Calculator

by | Apr 18, 2024

What is Profit Margin?

Profit margin is the money left over after the direct costs and other related expenses are covered.

The formula for profit margin is:

Profit Margin =

(Selling Price – Cost of Goods Sold – Other Expenses) / Selling Price

    Profit margin is typically expressed as a percentage, so you multiply the result of the equation by 100.

    For example, ($50 – $15 – $10) / 50 * 100 = 50%.

    Key factors that effect your profit margin are the cost of goods sold (COGS) and other expenses. 

    Let’s take a look at each – they’re important to understand. 

    Common Ecommerce COGS

    COGS represents the amount of money a company spends to create or purchase the items it sells to its customers.

    If you decide to make a product, COGS would likely include:

    • Raw materials
    • Direct labor for manufacturing
    • Factory overhead costs (e.g. rent, utilities, consumables)

    If you buy and resell finished goods, your COGS are simply:

    • The wholesale cost of the items you purchased for resale
    Examples of Cost of Goods Sold
    1. Product Costs:
      • Manufacturing or production costs
      • Raw materials
      • Components or parts
      • Direct labor costs (for manufacturing)
    2. Procurement Costs:
      • Purchase price of finished goods (for resellers)
      • Shipping and freight costs (inbound)
      • Import duties and taxes
      • Broker fees
    3. Inventory Costs:
      • Warehousing or storage fees
      • Inventory management costs
      • Inventory shrinkage or loss
    4. Packaging and Labeling Costs:
      • Boxes, bags, or other containers
      • Packing materials (bubble wrap, peanuts, etc.)
      • Labeling and printing costs
    5. Quality Control and Testing Costs:
      • Product inspection fees
      • Quality assurance costs
      • Testing and certification expenses
    6. Shipping and Handling Costs (Outbound):
      • Shipping and freight costs (outbound)
      • Postage and mailing costs
      • Shipping supplies (boxes, envelopes, etc.)
    7. Returns and Replacements:
      • Costs associated with processing returns
      • Replacement or refurbishment costs
    8. Royalties or License Fees:
      • Fees paid for using patented technologies or designs
    9. Indirect Labor Costs:
      • Salaries and benefits for employees involved in procurement, inventory management, and shipping
    10. Overhead Costs:
      • Rent or lease for warehousing facilities
      • Utilities for warehousing and storage
      • Depreciation of equipment used in manufacturing or handling inventory

    Other Expenses to Consider When Calculating Profit Margin

    Other expenses include operating and selling, general and administrative (SG&A) expenses. Advertising and payment processing are common “Other Expenses.”

    These are considered indirect expenses that are broken out separately in order to allow for better tracking and analysis.

      Examples of Other Expenses
      1. Marketing and Advertising Expenses
        • Online advertising (pay-per-click, display ads, social media ads)
        • Traditional advertising (print, TV, radio)
        • Marketing agency fees
        • Website hosting and maintenance
      2. Selling Expenses
        • Sales commissions
        • Sales team salaries and benefits
        • Travel and entertainment expenses
      3. General and Administrative Expenses
        • Rent and utilities for office/facilities
        • Office supplies and equipment
        • Legal and professional fees
        • Insurance premiums
        • Licensing and permit fees
      4. Payment Processing Fees
        • Credit card processing fees
        • Payment gateway fees
        • Transaction fees for online payments
      5. Shipping and Fulfillment Expenses
        • Outbound shipping and handling costs
        • Packaging materials
        • Third-party fulfillment services
      6. Customer Service Expenses
        • Customer support team salaries and benefits
        • Call center costs
        • Live chat software
      7. Technology and Software Expenses
        • Ecommerce platform fees
        • Inventory management software
        • Accounting and financial software
        • Email and communication tools
      8. Depreciation and Amortization
        • Depreciation of equipment, furniture, and fixtures
        • Amortization of intangible assets (patents, trademarks)
      9. Research and Development Costs
        • Product development expenses
        • Prototyping and testing costs
      10. Maintenance and Repair Expenses
        • Equipment maintenance and repairs
        • Vehicle maintenance and repairs
      11. Bad Debt Expenses
        • Accounts receivable that cannot be collected
      12. Interest Expenses
        • Interest on loans, lines of credit, or other debt
      13. Charitable Contributions and Donations
      14. Taxes (other than income taxes)
        • Property taxes
        • Payroll taxes
        • Sales taxes

      How to Properly Calculate Profit Margin (Step-by-Step)

      Calculating COGS per Unit:

      1. Identify all direct costs related to manufacturing or acquiring the products:
        • Raw materials
        • Direct labor
        • Rent/utilities for manufacturing facilities
        • Other factory overhead costs
      2. Add up these direct costs for the period (month, quarter, year).
      3. Divide the total direct costs by the expected number of units to be sold in that same period.

      Calculating Other Expenses per Unit:

      1. Identify all indirect operating expenses not directly tied to manufacturing:
        • Marketing/advertising
        • Sales commissions
        • General & administrative expenses
        • Rent for office/warehouse (not manufacturing)
        • Payment processing fees
      2. Add up these indirect expenses for the period.
      3. Divide the total indirect expenses by the expected number of units to be sold in that period.

      Then, to calculate profit margin:

      Revenue per Unit = Selling Price per Unit

      Profit per Unit = Revenue per Unit – (COGS per Unit + Other Expenses per Unit)

      Profit Margin % = (Profit per Unit / Revenue per Unit) x 100

      And there we have it – an all inclusive profit margin calculation.

      People often make the mistake of only considering the direct expenses in a business. There are always additional expenses – so make sure to include them.

      Now that we covered everything you need to know to calculate profit margins, how do you know what is good and what isn’t?

      What are Good Profit Margins for Ecommerce Stores?

      Profit margins for an eCommerce business can vary significantly depending on the business model and product sourcing, but here’s a general guideline:

      Business Model Profit Margin Range
      Dropshipping third-party products 15 – 30%
      Reselling generic products 15 – 30%
      Reselling brand-labeled/private-label products 30 – 50%
      Selling your own manufactured products 40 – 60%

      Different business models have different challenges and risks associated with them.

      I’ll leave you with two final thoughts:

      1. Generally speaking, the more unique, or differentiated, your product is, the more you can charge for it.
      2. Be extremely methodical about your expenses and control them at all cost (pun intended).

      FAQ

      What is the Difference Between Margin and Markup

      Margin refers to the profit a company makes after accounting for the costs associated with delivering a product or service.

      It is calculated as: Margin = (Revenue – Costs)/Revenue

      Markup, on the other hand, refers to the amount added on top of the cost to determine the selling price.

      It is calculated as: Markup = (Selling Price – Cost)/Cost

      Markup is used to initially price a product, while margin reveals the bottom-line profitability after all expenses are paid.