Gross Profit Margin
What is Gross Profit Margin?
The Gross Profit Margin (sometimes just referred to as Gross Margin) is the percent of revenue that is actual profit before adjusting for operating costs such as marketing, overhead, and salaries.
Advice from Ecommerce Experts: Why Gross Profit Margin is critical
“[Gross Margin] is a proxy for the profit potential of a business.” - Mahesh Vellanki, Principal at Redpoint Ventures
“The key to optimizing your ecommerce store is not even about revenue, but profit. If you change your business model, like offering free shipping, you can make more money, but still make less profit because of increased overheads. So when thinking about conversion optimization focus on increasing your profits monthly.” - Giles Thomas, Ecommerce Growth Consultant and Founder of AcquireConvert
“It’s okay to have low margin products. It is not okay to be unaware of the lack of profit those items are generating for your store.” - Meredith Boll, Partner at Evance Marketing
How to calculate Gross Profit Margin:
[ ($) Total Revenue - ($) Cost of Goods Sold ] / ($) Total Revenue X 100 = (%) Gross Profit Margin
Calculate your Gross Profit Margin by first subtracting the cost of good sold (COGS) from your total revenue. (You can select any time period such as daily, weekly, monthly, etc. and any product or group of products.) Then divide the resulting gross profit by the total revenue and multiply by 100 to generate your gross profit margin (%).
For example, if your total revenue this week is $1000 and your cost of goods sold is $700, then your Gross Profit Margin would be 30%. The Gross Profit in this example is $300.
[ $1000 - $700 ] / $1000 x 100 = 30%
Below are a couple examples of how you might view Gross Profit Margin on your ecommerce dashboard.
Gross Profit Margin is a vital health metric because it keeps the focus on growing profits, not just revenue. If you run a special promotion to increase purchases and/or the average order value, tracking Gross Profit Margin is an effective way to monitor and measure the profitability of the promotion.
This metric also highlights potential areas for improvement and will help determine whether to increase prices, reduce production costs, invest more in marketing spend, or perhaps discontinue a product altogether.
Gross Profit Margin immediately provides context since it shows the percent of profit, unlike Gross Profit ($) that shows an absolute profit value without the comparison to total revenue.
Gross Profit Margin doesn’t account for operating expenses such as overhead, salaries, and market spend. In order to factor in all expenses, you would need to calculate the Net Profit Margin.
Relevant Ecommerce Metrics and KPIs:
If you’re adding Gross Profit Margin to your ecommerce dashboard, you might want to also track these related ecommerce metrics for context.
The current average gross margin for ecommerce businesses is 38%, although it varies by company.
It’s important to understand the distinction between Gross Profit Margin and markup. Gross Profit Margin is the gross profit divided by the total revenue. Markup is the gross profit divided by the cost of goods sold (COGS).
Referencing our example from above, if your total revenue this week is $1000 and your cost of goods sold is $700, then your gross profit margin would be 30% and the markup would be 142%.
[ $1000 - $700 ] / $1000 x 100 = 30% Gross Profit Margin
[ $1000 - $700 ] / $700 x 100 = 142% Markup
Want to create a dashboard using this metric? Check out this example Ecommerce Dashboard.