What Are Good Ecommerce Profit Margins (& How To Maximize Yours)

December 9, 2022
7 min read

In this article:

Discover what the most successful ecommerce brands consider to be good profit margins and how you can achieve those margins.

One thing we can learn from Warby Parker and Allbirds? Revenue growth doesn't inherently mean profitable growth. 

The 2 consumer brands went public in 2021. But despite reporting astronomical sales, both brands' IPO documents revealed that they're operating at widening losses. Now, over a year later, the glasses retailer and the sustainable shoe brand still have no clear path to profitability despite increasing revenue.

How? 

Because revenue is a vanity metric that leaves out all the costs of doing business — from marketing and customer acquisition to operations and fulfillment. Meaning, it doesn't indicate whether your business actually makes money.

That's why the smartest DTC brands track their profit margins instead, so they know exactly how much they're putting in the bank. 

But what is considered healthy profit margins for an ecommerce business? And more importantly, how can you widen your margins (even if you're not hitting the mark quite yet)?

🤿 Before we dive in: Learn how to calculate your profit margins.

What is a good profit margin for ecommerce?

Eccomerce profit margins represent the percentage of each dollar you get to keep after expenses. So, the more money you have remaining after factoring in costs, the better your profit margins. 

For instance, a 20% profit margin (where you keep $.20 of every dollar) is better than a 10% profit margin (where you keep $.10 of every dollar).

However, the benchmark for "good profit margins" in retail depends on whether you measure gross or net profits. 

🧠 Keep in mind: While the figures below are general benchmarks. What your brand considers good profit margins might vary depending on your industry and niche.

Good gross profit margins 

In ecommerce, the general rule of thumb is that gross profit margins between 50-70% are considered "good." That said, NYU Stern School of Business reports an average of 41.54% for gross profit margins

Keep in mind that gross profit margins measure the profit you make after subtracting the cost of goods sold (COGS) but before deducting all other expenses (like warehouse or shipping costs). So, this measurement is not a perfect picture of profitability – just a quick snapshot of your company's financial health. 

Good net profit margins

Shopify found 10% net profit margin is average for ecommerce brands (this has since become the benchmark for good net profit margins). Meanwhile, high net profit margins sit around 20%, and low margins around 5%. 

Remember that good net profit margins will always be less than good gross profit margins. Why? Because net profit margins deduct operating expenses and COGS from your total revenue (gross only deducts COGS). As a result, this measurement provides a more accurate snapshot of your business' profitability.

Why profit margins are important

Profit margins are important because they represent your company's financial health. By calculating your gross and net profits, your brand can quickly gauge whether it's turning a profit, scraping by, or straight-up burning cash. 

For instance, if your profit margins are dangerously low (AKA, really bad), you run the risk of running out of capital. When this happens, you won't have the cash to keep operating. This makes it nearly impossible to survive in a competitive market -- let alone grow your brand. 

("Lack of capital" was the top reason businesses closed in 2021.)

That said, if you have healthy profit margins (and an optimized inventory), you'll naturally free up working capital to grow your business. With this capital, you can buy more stock, develop new products, hire new talent, launch a new channel or double down on what's already working. 

4 ways to instantly improve your profit margins

Needless to say, the higher your profit margin, the better off your business will be. So, when you need a quick boost, there are 4 tried-and-true ways to boost your profit margins and maximalize your profitability ASAP. 

1. Increase prices

Raising your selling price isn't the best strategy for increasing profit margins — but it is one strategy available to brands. To make it work, you need a really good reason to hike prices, or your customers could lose trust, flee, and find a better option. Especially when pandemic-induced inflation and supply-chain disruptions are already impacting customer loyalty.

In the last year, 71% of consumers worldwide switched brands, and ~66% of those consumers made that change to secure a better deal. That means many consumers are ditching brand loyalty for better value. And if you raise prices too high too quickly, you could risk getting fewer sales and profits.

So, if you decide to go this route, there are 2 things to consider:

  1. What you need to charge to be profitable. To do this, use  Shopify's profit margin calculator to quickly gauge how much you'll need to markup products to ensure your gross profits cover your operational costs.
  2. What customers are willing to pay. Sure, you can just set a price and hope for the best. But Drew Marconi, co-founder of revenue optimization tool Intelligems, suggests testing product pricing

🤿 Dive deeper: Run pricing experiments that’ll boost your margins by 5-20% – here’s how.

2. Lower cost of goods sold

What's a more effective way to increase profit margins than raising prices? Lowering your cost of goods sold. 

COGS and profit margins have an inverse relationship with one another. So, the less you spend purchasing your inventory, the higher your profit margins will be.

And the best way to do this is to optimize your inventory. Meaning, you carry the right amount of stock to meet customer demand -- nothing more, nothing less.

Inventory optimization prevents common (and expensive) retail mistakes that can quickly wreck your profit margins, like stockouts and dead stock. Stockouts, for instance, cost brands $1T every year. Meanwhile, dead stock costs brands a shocking 30% more than the inventory's value on average. 

Alternatively, you can negotiate lower vendor prices if your brand's inventory is already optimized. How? 

Lalo shared their 12-month production plans (which they generated with Cogsy) with its suppliers. Then, using this predictability and transparency as leverage, the baby brand lowered its down payment by 50% and secured more favorable terms, keeping more capital free. However, you could use this same strategy to reduce your per-unit cost, increasing your margins.

🤿 Dive deeper: Dicsover the 16 best practices of vendor contract negotiation. 

3. Increase average order value

Average order value (AOV) is an inventory management KPI representing the average amount a customer spends per transaction with your online store. And increasing AOV has a twofold effect: higher revenue and lower costs. 

That's because AOV typically increases when customers buy more items, not more expensive items. So, when your AOV increases, you'll spend less fulfilling each transaction (since those items can be picked, packed, and shipped together). 

Simultaneously, you'll accelerate your inventory velocity. Meaning, you'll move more merchandise faster, preventing SKUs from racking up extra holding costs

But how can you increase your average order value? There are a few ways you can go about it: 

  • Set minimum order quantities (MOQs). While these don't have to be required (like your supplier's MOQs), they should entice customers to hit that minimum amount. For instance, Huron gamifies its softly imposed MOQs by implementing unlockable perks (customers get free shipping when they spend $40 and a free product when they spend $50). 
  • Leverage product bundling. Bundling is when you sell 2+ products for less than the price of buying these items separately. The perceived value then encourages customers to opt for the bundle over buying each product individually over time. For example, men's soap brand Dr. Squatch bundled its limited edition holiday soaps as an exclusive holiday set. (Customers save $4 when they purchase the set.)
  • Add product recommendations throughout your site, recommending other products that customers might like. These recommendations should either cross-sell or upsell customers based on items they've recently looked at or added to their cart. While seemingly simple, this can have a huge impact on AOV. In fact, roughly 35% of Amazon's sales come from product recommendations.
Dr. Squatch product bundle example
Source: Dr. Squatch

4. Improve your operations 

Finally, brands can improve their profit margins by focusing on operational excellence. In this process, businesses scale parts of their operations that already work and minimize those that don't. 

For example, you could find better shipping routes that reduce waste or automate a time-consuming process to save time. This naturally reduces operating costs that can shrink your margins. Then, you can take it a step further by planning inventory from the bottom up. 

Bottom-up inventory planning considers your suppliers' production schedules and the stock you need at any given time. Then, you can cautiously layer on growth strategies and scheduled marketing events to get closer to your actual customer demand. 

This means you end up with more accurate inventory forecasts. And as a result, you avoid costly inventory mistakes (like stockouts or holding too much inventory), reduce operational costs, and improve margins. 

🤫 Psst – Botton-up forecasting (along with updating projections as new information becomes available) is Cogsy's secret to building the most accurate demand plans available. 

How Cogsy raises your profit margin

Operational excellence can seem out of reach, but any brand (especially yours) can do it. And leveraging an ops optimization tool like Cogsy only makes it easier!

That's because Cogsy turns your static operational data into actionable insights. With these insights, your brand can increase its margins by: 

  • Reducing inventory waste with accurate forecasts, so you only stock what’ll sell
  • Increase your AOV by offering bundles and backorders
  • Providing manufacturers the predictability they want in exchange for lower prices
  • Generate more revenue (40% more on average) while lowering your operational costs 

But don’t take our word for it – try Cogsy free for 14 days.

Ecommerce profit margin FAQs

Get answers to the most common profit margin questions. 

What is the average profit margin in ecommerce?

In ecommerce, the average gross profit margin is 41.54%, and the average net profit margin is 10%. 

What is a bad profit margin?

Bad profit margins are those that cannot sustain the business' operations or unlock growth. For ecommerce, net profit margins below 5% are widely considered bad profit margins. 

What is the formula for calculating profit margin?

The formulas for calculating profit margins are as follows: 

  • gross profit margins = (revenue - cost of goods sold / revenue) x 100
  • net profit margins = ((revenue - COGS - total expenses) / revenue) x 100

What are the benefits of high profit margins?

The biggest benefit of high profit margins (assuming proper inventory management) is freed-up working capital. With this extra cash, brands can unlock new growth by running more marketing initiatives, developing new product lines, testing new sales channels, and more. 

Reach your most audacious revenue goals

See how you can generate 40% more revenue and save 20+ hours a week with Cogsy. Try it free for 14 days.

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