Understanding the gross margin of your online products is essential for tracking the overall financial success of your ecommerce store. By monitoring gross margin on an ongoing basis, store owners can better control costs and prevent unwanted surprises.
While gross margins vary widely by product and industry, a survey of ecommerce companies by Marketing Sherpa found the average gross margin of products is 30% for smaller online stores and 37% for larger ecommerce businesses.
What Is Gross Margin?
Gross margin is the amount of money you make per product sold. It’s determined by calculating the difference between the cost to make or buy a product and the online selling price.
For example, if you sell a product for $10.00 and it cost you $6.00 to make, you’ve made a gross profit of $4.00. Your gross margin would be 40%.
How Do You Calculate Gross Margin?
Selling Price – Cost Of Goods Sold = Gross Margin
Cost of Goods Sold, or COGS, refers to the expenses that are directly associated with your product, including raw materials, packaging and factory overhead. For details on how to accurately calculate COGS and why it’s important for your ecommerce store, click here.
Improving Gross Margin
After analyzing your gross margin, you’ll need to decide what to do with the data you’ve collected. If you determine your margin is lower than you would like it to be for one or more of your products, it’s time to find opportunities for improvement.
You’ll want to look at the two variables that determine gross margin: Cost of Goods Sold and Selling Price. There are several options for reducing Cost of Goods Sold and increasing margins:
- Buying products or material in bulk
- Renegotiate with your suppliers
- Contract with a different supplier
- Streamline and automate your inventory process
- Eliminate waste where you have control
The selling price of your products can also be manipulated. Some ecommerce stores use gross margin goals to calculate their pricing. Shopify offers an online Profit Margin Calculator to help online retailers determine the best product selling price based on profit and margin.
Raising product pricing is not ideal for every situation but it is one way to improve your margins. Even the smallest increase in price can have a significant impact on your bottom line, especially with high volume products.
You’ll also want to review the discounts you are offering. While an attractive coupon or promotion may increase sales volume, if your margin is next to nothing you could be robbing yourself of profit just to pay your bills. If there is a product with consistently low margins, it’s worth considering whether or not to continue selling the product altogether.