Home E-commerce university Gross profit margin – how to measure it in e-commerce?

Gross profit margin – how to measure it in e-commerce?

The margin is one of the basic financial indicators that allows determining the condition of a particular e-commerce. This metric shows what part of the revenues obtained by the e-store is a surplus in relation to the costs incurred. In general ‒ it allows you to estimate real profit.

How to calculate the gross profit margin?

The formula used to calculate this indicator is as follows:

Gross\: profit\: margin = \dfrac{revenue- cost\: of\: goods\: sold}{revenue} *100\%

 

When analysing the gross profit margin, it is important to take into account that the costs of goods sold should cover all expenditures that are directly related to its acquisition or production ‒ including costs of materials, energy or the amount of work necessary to produce a given product. Other costs related to the functioning and maintenance of e-commerce, even if they constitute a significant share of the total costs of the company, are not included in the calculations at this stage of the analysis.

For example, if the revenue from sales in your online store amounted to £2,000 in the last month and the costs reached £1,300, then the gross profit is £700 and the gross profit margin is 35%.

How to analyse the gross profit margin?

Simply put ‒ the gross profit margin allows for estimating on which products your online store earns, and on which it loses. Its value can be treated as a surplus which, after the sale of goods, can be used to compensate for fixed costs.

Referring to the example presented ‒ from every £1 of revenue, 36 pence can be used to cover other expenses. Therefore, the higher the gross profit margin, the better.

The gross margin, as well as other indicators related to e-commerce, should be analysed in relation to:

  • specific time intervals,
  • average results achieved in a given industry by other entities,
  • different product categories within the same online store.

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