Profit margin
Profit margin is the share of revenue a business keeps as profit after costs, shown as a percentage, and it shows how much each sale really earns.
What is profit margin?
Profit margin tells you how much of every sale you keep after paying costs. It is shown as a percentage of revenue. There are several levels. Gross margin subtracts only the cost of the product itself. Contribution or net margin also subtracts costs such as shipping, payment fees, packaging, ad spend and other expenses. For an online store, margin matters more than revenue alone, because high sales with thin margins can still lose money. Margin also sets how much you can afford to spend on ads to win a customer. A product with a healthy margin gives you room to test ads, offer discounts and still stay profitable.
How to calculate profit margin
Profit margin equals profit divided by revenue, multiplied by 100. Start with the selling price, subtract all the costs you want to include, and divide what is left by the price. For example, a product sells for 50 dollars. The product costs 15 dollars, shipping 6 dollars, and payment fees and packaging 1.75 dollars, for total costs of 22.75 dollars. Profit is 50 minus 22.75, which is 27.25 dollars. Margin is 27.25 divided by 50, which is 0.545, or 54.5%. That is the margin before ad cost. If you then spend 20 dollars on ads per sale, profit falls to 7.25 dollars and margin falls to 14.5%.
What is a good profit margin?
A good profit margin varies by niche, price point and business model. Products sold through paid social ads typically need a higher gross margin than products that sell through search or repeat orders, because ad costs take a big share of each sale. Many direct-to-consumer brands aim for gross margins well above half of the selling price to leave room for ads, but there is no single right number. Low-margin products can still work with high order volumes, subscriptions or strong repeat purchases. The most useful test is whether the margin left after all costs, including ads and refunds, stays positive at the scale you want.
How to improve profit margin
Raise prices where your product offers clear value, and test the change carefully. Negotiate lower unit costs with suppliers or order larger runs once a product is proven. Bundle items or set a free-shipping threshold to raise average order value, so shipping and fees are spread over more revenue. Cut packaging and fulfilment waste. Reduce returns with better sizing guides and clearer product descriptions. Improve conversion rate so the same ad spend brings more orders. Review discount policies, since frequent deep discounts quietly erase margin. Check margin per product, not only for the store as a whole, and stop pushing items that do not pay their way.
Profit margin vs markup
Margin and markup use the same numbers but measure different things. Margin is profit as a share of the selling price. Markup is profit as a share of the cost. If a product costs 20 dollars and sells for 50 dollars, profit is 30 dollars. Margin is 30 divided by 50, or 60%. Markup is 30 divided by 20, or 150%. Mixing them up leads to pricing mistakes, so always check which one a supplier, partner or report is using. Most pricing tools and ad-cost calculations, including break-even ROAS, are based on margin, not markup.
Free tool: Profit Margin Calculator
Questions
- How does profit margin relate to break-even ROAS?
- Break-even ROAS equals 1 divided by your profit margin before ad cost. With a 54.5% margin, break-even ROAS is about 1.83, so each dollar of ad spend must bring in at least 1.83 dollars of revenue.
- What is the difference between gross and net profit margin?
- Gross margin subtracts only the cost of goods from revenue. Net margin subtracts every cost, including shipping, fees, ads, software and staff, so it shows what the business truly keeps.
Related terms
- COGS (cost of goods sold)COGS (cost of goods sold) is the direct cost of producing or buying the products you sold in a period, including materials, manufacturing and inbound freight.
- Break-even ROASBreak-even ROAS is the return on ad spend at which ad revenue exactly covers product costs and ad spend, leaving zero profit and zero loss.
- ROI (return on investment)ROI (return on investment) is the profit an investment makes relative to its total cost, shown as a percentage, to judge if money was well spent.
- Discount codeA discount code is a word or string a shopper enters at checkout to get money off, free shipping or another deal, often used to track a campaign or partner.