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How to Calculate eCommerce Profit Margins (+ Tips to Improve Them)

how to calculate ecommerce profit margins
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Running an eCommerce business is fun and exciting but comes with its fair share of challenges. Keeping a close eye on your company’s profit margins is one of the most important aspects of ensuring your online business’ long-term success.

Profit margins are the lifeblood of any business, eCommerce or otherwise. They represent the amount of revenue left over after accounting for all the costs of producing and selling your products. The higher your margins, the more financial breathing room you have to reinvest in growth, battle economic downturns, and ultimately build a sustainable, profitable company.

Different Types of Profit Margins 

Profit margins measure a company’s profitability and financial health. They provide insights into how efficiently a business operates and convert revenue into profits after accounting for expenses. Profit margins can also compare performance against competitors, analyse trends, and make strategic decisions about pricing, cost management, and growth initiatives.

When analysing your eCommerce business’s profitability, there are three main things to track: gross profit margin, operating profit margin and net profit margin. 

Gross Profit 

Gross profit margin shows the percentage of revenue left over after deducting the direct costs of producing goods or services. 

Gross margins give an idea of how efficiently a company can manufacture and sell its products or services before factoring in operating expenses, interest payments, and taxes. A higher gross profit margin shows the company has tighter control over direct production costs.

Operating Profit

The operating profit margin measures the percentage of profit a company makes from its operations before deducting interest and taxes. 

The operating profit margin shows how much profit is generated from a company’s core business operations per pound of revenue earned. It helps assess operational efficiency by excluding non-operating items like interest and taxes.

Net Profit 

The net profit margin is the percentage of revenue left after deducting all expenses, including operating costs, interest, taxes, and preferred stock dividends.

The net profit margin represents the total profit a company takes from its total revenue or net sales. It is the most inclusive profitability ratio as it accounts for all costs – direct production expenses and operating costs, interest, and taxes. A higher net profit margin means a company is more efficient at converting revenue into actual profit.

How to Calculate Profit Margin 

Gross Profit Margin Formula

How to Calculate eCommerce Profit Margins (+ Tips to Improve Them)

Let’s say your eCommerce store had £100,000 in revenue last month, and the cost of goods sold was £60,000.

The gross profit margin would be calculated as:

Gross Profit Margin = (£100,000 – £60,000) / £100,000 = £40,000 / £100,000
= 0.4 or 40% expressed as a percentage 

So, in this example, your gross profit margin is 40%.

Operating Profit Margin Formula

How to Calculate eCommerce Profit Margins (+ Tips to Improve Them)

If your total revenue was £100,000, and your operating income (revenue minus operating expenses) was £25,000, your operating profit margin would be:

Operating Profit Margin = £25,000 / £100,000
= 0.25 or 25%

An operating profit margin of 25% means your company kept 25 pence of every pound earned as operating profit.

Net Profit Margin Formula

How to Calculate eCommerce Profit Margins (+ Tips to Improve Them)

Using the same £100,000 revenue, let’s say your net income after expenses like interest and taxes was £15,000. The net profit margin would be:

Net Profit Margin = £15,000 / £100,000
= 0.15 or 15%

So for every £1 in revenue, your company retained 15 pence in net profit after all expenses were paid.

What is considered a good profit margin?

Determining what is considered a “good” profit margin for your eCommerce business can be tricky, as it depends on several factors like your industry, operating costs, growth stage, and more. However, there are some general guidelines you can follow.

The first step is to calculate your current profit margins and your profit margins going back over the last six months if you have that data available. From there, you can compare month-to-month and calculate your average over that timeframe. This will give you a benchmark to work with.

Next, compare your benchmark to the industry average profit margins to see how you measure up. This can help you set realistic goals to stay competitive and support long-term business health. 

However, it’s important to note that profit margin averages can vary significantly across different types of business. As a general rule of thumb, a gross profit margin above 60% is considered good, while anything over 70% is excellent. Above 10% is a good target for net margins, with margins over 20% being phenomenal for eCommerce businesses.

Tips to Improve Your Profit Margins

If your profit margins aren’t quite cutting it, don’t worry – you can implement plenty of strategies to boost those all-important numbers. 

Increase Average Order Costs 

Finding ways to increase the average order value for each customer can improve your profit margins. You can offer bundle deals, create upselling/cross-selling strategies, or provide free shipping over a specific order limit. 

A third-party logistics (3PL) operator like us at Delta Fulfilment can help through optimised packing processes for efficient bundling and add-on services. Our order management technology also makes setting up upsell/cross-sell prompts during checkout easy.

Streamline Operations 

Increasing operational efficiency reduces wasted time, effort, and resources, impacting your bottom line. Look for ways to automate processes, optimise inventory management, and cut out unnecessary steps.

Working with a 3PL who have highly streamlined fulfilment workflows can boost your operational efficiency. With our specialised workforce, warehouse management systems, and optimised pick and pack processes, we can fulfil orders far more efficiently than most eCommerce businesses can in-house.

Reduce Operating Costs 

Thoroughly audit your operating costs like warehousing, shipping, supplies, utilities, software subscriptions, etc. Renegotiate contracts, switch to lower-cost providers, and cut any non-essential expenses. 

3PLs can significantly reduce fulfilment operating costs through economies of scale. You can dramatically lower your per-order fulfilment spend using our centralised warehousing, logistics planning, and bulk shipping discounts.

Build Customer Loyalty and Retention  

Retaining an existing customer costs far less than acquiring a new one. Prioritise excellent customer service, offer loyalty programs, and deliver a stellar end-to-end experience. 

As a fulfilment partner, we can ensure fast, accurate shipping and seamless returns – key drivers of customer satisfaction. With us handling your logistics, you can count on reliable delivery times, careful package handling, and a hassle-free returns process that keeps customers coming back.

Buy in Bulk 

For physical products, buying inventory in bulk allows you to take advantage of supplier volume discounts and lower your per-unit costs. Just be careful not to overstock.

At Delta Fulfilment, we provide inventory forecasting and storage solutions to help maximise bulk purchasing savings. Our demand forecasting tools and scalable warehousing space make it easier to buy the optimal amount of inventory and store surplus stock cost-effectively.

Increase your Profit Margins with Delta Fulfilment 

Boosting profit margins is a must for any eCommerce business wanting to thrive long-term. While there are lots of tips and tricks to improve those numbers, partnering with a top 3PL like us at Delta Fulfilment gives you a serious leg up. Our fulfilment solutions check all the boxes – streamlined operations, lower costs, and happier customers. So, if you’re ready to level up your margins and profits, contact us today – we’ve got the goods to support your growth goals every step of the way.

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