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The real margin of your e-commerce store: how to calculate it and where it leaks

Revenue is not profit: how to work out what is really left from every online order after VAT, fees, shipping, returns and advertising.

Many online stores look mainly at revenue: growing orders, average basket, traffic. But the number that decides whether an e-commerce business holds up is a different one: the real margin, meaning what is left in your pocket after paying for everything it takes to get the product to the customer. It is common to find that some products, or some channels, sell a lot but earn little or nothing.

From price to margin: what to subtract

The price your customer pays is not clean income. Before talking about profit, you need to subtract a series of items that look small one by one:

• ▸VAT: the retail price includes it, but it is not yours
• ▸Product cost, including inbound freight and any duties
• ▸Fees for payments (cards, PayPal, buy now pay later) and for the marketplace, if you sell on Amazon or similar
• ▸Shipping and packaging, especially if you offer it for free
• ▸Returns and refunds, with the handling costs that come with them
• ▸Advertising: how much you spend on average to get one order

A concrete example

Take a product sold for €49 including VAT. Once 22% VAT is removed, about €40 is left. If the product costs €18, shipping €6, payment fees about €1.50 and advertising €8 per order on average, the margin drops to about €6.60: just over 16% of the net price. A 10% discount is enough to cut it by more than half, and one return every ten orders thins it further.

To run these numbers on every product in a minute, you can use the free calculator I put online: enter price, costs and fees and see straight away what is left.

Where margin leaks without you noticing

• ▸Free shipping with no minimum: on small orders it eats the whole profit
• ▸Discounts across the whole catalog, including products that already have thin margins
• ▸Ad campaigns that bring sales, but at too high a cost per order
• ▸Returns never analyzed: a few problem products can weigh on all the others
• ▸Payment and marketplace fees never compared or renegotiated

Advertising: break-even ROAS

For campaigns, the number to know is the break-even ROAS: how many euros of sales each euro of advertising must generate so you don't lose money. It comes straight from the margin. With a 35% margin before advertising, for example, you need about €2.90 in sales for every euro spent just to break even. Below that threshold every sale costs more than it brings in, even if revenue grows.

Discounts and promotions: how far to go

A 20% discount does not take 20% off your margin: it takes much more, because costs stay the same while the price drops. Before a promotion it pays to calculate how much margin is left and how many extra sales you need to make up for it. Sometimes a targeted discount on a few products, or free shipping above a threshold, earns more than a discount on everything.

How I analyze an e-commerce store's margins

When I analyze an online store I start from the real data of the last few months: products, orders, returns, shipping costs and campaigns. I calculate the margin by product and by channel, find where it leaks and propose a few targeted fixes, in order of impact: prices, shipping thresholds, ad budget, product range. The first fixes often don't require selling more, but selling better.