An eCommerce margin is the difference in price between what your business and customers pay for the same product or service. The higher this margin, the better it is for your business.
Store owners who track their eCommerce margins understand that the sign of a healthy and flourishing business is profit.
When it comes to improving profitability, how well you are managing and increasing your profit margins goes a long way in determining your business's overall strength and success, both online and in-store.
To get an accurate picture of how profitable your business is, you must include overhead expenses and other variable costs to understand the actual cost of acquiring a product.
As such, there are three types of eCommerce margins that businesses track to know the degree to which their operations are making money, including
Gross profit margin measures revenue against the cost of goods sold (COGS). It is used to assess a company's financial health and indicates the revenue remaining in a given accounting period after paying for direct expenses.
Gross profit margin is calculated by subtracting the cost of goods sold (COGS) from total revenue and dividing the difference by total revenue.
Operating profit margin measures the company's ability to generate profit through its core operation after paying variable production costs. It indicates how efficiently a company manages its costs/expenses associated with its operations.
Operating profit margin is calculated by dividing operating profit by gross revenue. Operating profit is gross profit minus operating costs (overheads).
Net profit margin measures how much profit the company generates after paying the operating expenses plus taxes, interest, and any other relevant expenses. It is the most accurate indicator of profitability and financial success.
Net profit margin is calculated by dividing a company's net profit (also called net income, net earnings, or bottom line) by its total revenue.