Foundation · 3 min
What you need to know
How do I measure ecommerce profitability?
Build a profit model that starts with net order revenue and subtracts product cost, payment fees, shipping costs, discounts, return costs, advertising and allocated operating expenses. Define which costs are variable and which are fixed or allocated.
Revenue vs profit: what’s the difference?
Revenue is the gross or net amount a customer pays. Profit is what remains after all costs of generating and fulfilling that order are subtracted. A store can grow revenue while profit falls if costs rise faster than sales.
What is gross margin?
Gross margin is net revenue minus cost of goods sold, expressed as a percentage of net revenue. It excludes fulfillment, payment, marketing and operating costs, so it overstates true profitability.
How is product margin calculated?
Subtract the product’s landed cost from its net selling price after discounts. Landed cost includes purchase price, import duties, inbound shipping and applicable storage. State whether taxes, refunds and promotional discounts are included.
What costs should be included in ecommerce profitability?
Include product cost, payment processing fees, outbound and return shipping, discount value absorbed, return handling costs, attributable advertising cost and a consistent allocation of operating expenses such as platform fees, packaging and customer service.
Should payment fees be included?
Yes. Payment processing fees are a direct variable cost of each transaction and should be subtracted before reporting profit per order.
Should shipping costs be included?
Yes. Both outbound and return shipping costs should be included. When the merchant absorbs shipping or offers free shipping, these costs reduce order profitability and should be modeled at the threshold used for free-shipping offers.
Should discounts be included?
Yes. Discount value reduces net revenue. State whether the discount is pre-applied to net revenue or subtracted separately, so the profitability model is consistent.
Should return costs be included?
Yes. Return shipping, restocking, inspection and write-off costs all reduce profitability. Model them using return rate and average return cost per order for the relevant product or category.
Should advertising costs be included?
Include attributable advertising cost when calculating post-marketing profitability. State the attribution rule and distinguish pre-marketing from post-marketing contribution, so the two figures are not mixed.
Why can a high-revenue product be unprofitable?
A product may generate high revenue but still be unprofitable if its margin is thin, its return rate is high, its advertising cost per acquisition is steep, or its fulfillment cost is disproportionate to its price.
A quick store check
Rebuild one order from net sales through every variable and allocated cost to its final profit. Identify which cost component is largest and whether it varies significantly across product categories.
Foundation · 2 min
Frequently asked questions
Is gross margin the same as store profit?
No. Gross margin subtracts product cost but not all fulfillment, payment, marketing, service and operating expenses.
Should fixed overhead be assigned to every order?
Only through a documented management-accounting method; keep contribution and fully allocated profit clearly separate.