What Is Profit Margin? Formula, Net vs Gross

The Profit Margin Formula

Profit margin = Net profit ÷ Revenue × 100

Net profit is your revenue minus every cost of running the store. Revenue is what customers paid after discounts and refunds. Use the same date range for both.

Two other margins start from the same revenue but take out fewer costs. Gross margin takes out only product costs. Operating margin also takes out running costs like ads and shipping, but stops before tax and loan interest.

Three Margins From One Dog Treat Store

One month at a small online dog treat store: 800 orders and $40,000 in revenue.

What comes out	What's left	Margin
Product costs: $16,000	$24,000	60% gross margin
Running costs: $18,000	$6,000	15% operating margin
Income tax: $1,200	$4,800	12% net profit margin

Running costs are shipping and packaging ($4,800), ads ($9,200), payment fees ($1,100), the Shopify plan and apps ($500) and part-time help ($2,400).

So the store keeps 60 cents of each dollar once the treats are paid for. After everything else, it's down to 12 cents.

Gross profit is a dollar figure, the $24,000 left after product costs. Gross margin turns it into a percentage, 60%, but leaves out ads, shipping and the rest.

Why 10% Off Can Cut Profit by About Two-Thirds

Now the store runs 10% off everything, and the same 800 orders come in. Orders averaged $50, so each one now pays $5 less. That's $4,000 less revenue.

The treats, boxes and ads cost the same as before. Payment fees shrink a little, but nearly all of that $4,000 comes out of profit. Profit before tax falls from $6,000 to roughly $2,000, which takes the operating margin from 15% to under 6%.

Extra orders from the sale have to fill that gap before the discount pays off. The catch with blanket discounts is that every shopper gets one, even people who'd have paid full price. See how blanket discounts hurt your profit margin for what to do instead. To pick a number, start with finding your optimal discount rate.

Growth Suite, our app, shows its time-limited offers only to visitors it predicts are less likely to buy.

The Margin in Your Shopify Admin Is Gross, Not Net

Add a "Cost per item" to a product, and Shopify shows its profit and margin in the pricing section. That margin is just the price minus the cost per item, as a share of the price. Ads, shipping, payment fees, apps and staff aren't in it.

Shopify's profit reports also work from cost per item, so they end at gross profit. To get net profit margin, pull in the other costs from your ad accounts, Shopify bill and bank statement.

It's the most common mix-up. The dog treat store might see product margins near 60% in the admin, while its real profit margin is 12%.

Where Profit Margin Can Fool You

It's a percentage, so it can't tell you how much money you made. A 20% margin on $10,000 in sales is $2,000. An 8% margin looks worse, but on $100,000 it's $8,000.

Sometimes it looks better for the wrong reason. Cut your ads, and next month's margin may climb even as sales and total profit fall.

A store-wide number hides the details. A healthy 12% can include products or small orders that lose money on every sale. Check margin next to profit in dollars, and by product when you can.

Related Terms

Cost of Goods Sold (COGS): the supplier or making cost of the items you sold.
Breakeven Point: how much you must sell before any profit shows up.
Discount Percentage: the share taken off a price, paid out of your margin.
Average Order Value (AOV): the average spend per order, $50 in the example above.