Profit margin shows what percentage of your revenue remains after all relevant costs have been deducted.
This short article shows you how profit margin is calculated. Check out also our free online profit margin calculator.
Profit margin formula
Profit margin = Profit ÷ Net revenue × 100
Net revenue means sales revenue after refunds and discounts have been deducted.
For example, if your store generates €10,000 in net revenue and your total costs are €8,500:
Profit = €10,000 − €8,500 = €1,500
Profit margin = €1,500 ÷ €10,000 × 100 = 15%
This means that €0.15 of every €1.00 in net revenue remains as profit.
How ecommerce profit is calculated
For an ecommerce business, profit should account for more than just product costs and advertising.
Ecommerce profit =
Net revenue
− Product costs
− Shipping and fulfilment costs
− Payment and platform fees
− Advertising spend
− Return handling and other variable costs
− Fixed operating costs
Depending on the business, fixed operating costs may include salaries, software subscriptions, warehouse costs, agency fees, accounting and other overhead.
Profit margin vs. gross margin
Gross margin usually measures how much revenue remains after product costs and other direct costs of sale.
Profit margin goes further by also including advertising and operating costs.
A store can therefore have a healthy gross margin while still losing money after marketing and overhead are taken into account.
Profit margin vs. ROAS
ROAS measures how much revenue was attributed to advertising compared with the amount spent on ads.
ROAS = Attributed revenue ÷ Ad spend
For example, a 4.0× ROAS means that €4.00 in revenue was attributed to every €1.00 spent on advertising.
However, ROAS does not account for product costs, shipping, fees, refunds or operating expenses. A campaign can therefore show a strong ROAS and still be unprofitable.
The calculator compares your current ROAS with your break-even ROAS to show whether your advertising is likely to produce profit after the costs you entered.
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