Do you want to improve your ecommerce business’s profitability? Of course, you do! One way to accomplish this is by learning how to use a sales margin formula. 

This helpful formula can tell you how much money your business is making on each product sale. It’s also a helpful reference point to see how your business compares to your peers.

Armed with your profit margin information, you can then tweak your prices and inventory to boost profits and your bottom line. In this blog post, we’ll give a basic overview of the sales margin formula and provide some examples to help clarify how to read and use this data to grow your business. 

The bottom line is that the higher your sales margin, the more profit your ecommerce business makes.

What is sales margin?

Sales margin is the term used to describe the difference between a product’s selling price and its cost price. This figure can be expressed as either a percentage or an absolute value.

The sales margin is a crucial metric for businesses, as it provides an indication of profitability. For example, if a product has a sales margin of 10%, this means that for every $1 the product is sold for, the company makes 10 cents of profit.

Businesses need to make sure that their sales margins are high enough to cover their costs and generate a profit. If margins are too low, it can be challenging to stay in business or to overcome unforeseen business expenses.

There are several ways to increase sales margins. One way is to increase the selling price of products. Another way is to reduce the cost price of products, either by negotiating better deals with suppliers or by finding ways to be more efficient in the production process.

Businesses must strike a balance between maintaining high sales margins and being competitive in the marketplace. If prices are too high, customers will go elsewhere. If prices are too low, businesses may struggle to make a profit.

It is important to remember that the sales margin is just one metric that businesses need to consider when making decisions about pricing and profitability. Other factors, such as manufacturing overhead costs and customer demand, also play a role in setting prices. Ultimately, businesses need to use all the information at their disposal to make decisions that will help them achieve their financial goals.

How do you calculate sales margins?

The formula for calculating sales margin is: 

(Revenue – Cost of goods sold) / Revenue = Sales margin

One common error when calculating the sales margin is failing to include all of the costs that go into making and selling the item when determining the cost of goods sold. You’ll need to include all sales discounts and allowances, the cost of all of the materials required in the production of the goods or service, all payments to employees for producing the product or service, as well as any other expenses, such as a salesperson commission.

Sales margin formula example

Let’s say that you want to sell a new startup coaching service for $100 but aren’t sure if that will yield a good profit. You determine that the cost of the materials needed in the service is $10. And the cost of your time to complete the service is $40. You would calculate your sales margin as follows:

[100 – (40+10)] / 100 = Sales Margin

You would find that your sales margin is 50%.

Sales margin vs. gross profit margin

Sales margin and gross profit margin are two key metrics that businesses use to measure their profitability. Both measures show how much profit a company makes on each sale but differ in how they calculate this figure.

Sales margin simply takes the total sales revenue and subtracts the cost of goods sold (COGS). This number represents the pure profit that a company makes on each sale before taking into account any other expenses.

Gross profit margin, on the other hand, takes into account all of a company’s expenses, not just the cost of goods sold. To calculate gross profit margin, you take the total sales revenue and subtract the cost of goods sold, as well as all other expenses, such as marketing, administration, and rent.

The main difference between sales margin and gross profit margin is that sales margin only considers the cost of goods sold, while gross profit margin takes into account all expenses. This means that gross profit margin is a more accurate measure of profitability.

However, both measures are useful for different purposes. Sales margin is an excellent metric to use if you want to see how much profit a company makes on each sale. Gross profit margin is a better metric to use if you want to see the overall profitability of a company.

Which metric you should use depends on your specific goals and objectives. If you’re trying to optimize profitability, then gross profit margin is the metric you should be focusing on. If you’re trying to increase sales, then sales margin is the metric you should be focusing on.

No matter which metric you use, it’s important to track both measures over time to see how your business is performing. By monitoring these metrics, you can make changes to your business model and improve your profitability.

Margin vs. markup

Margin is the difference between your selling price and your cost of goods sold (COGS). For example, if you sell a product for $100 and it costs you $60 to make, your margin is $40. Margin is usually expressed as a percentage of the selling price, so in this case, your margin would be 40%.

Markup is the difference between your cost of goods sold and your selling price. For example, if you sell a product for $100 and it costs you $60 to make, your markup is $40. Markup is usually expressed as a percentage of the COGS, so in this case, your markup would be 67%.

So, what’s the difference between margin and markup? Margin is the portion of the selling price that is profit, while markup is the portion of the COGS that is profit.

There are a few things to consider between margin and markup. 

First, the margin is typically easier to calculate since you need to know your selling price and COGS. Markup, on the other hand, requires you to know both your selling price and your competitor’s prices, which can be challenging to track.

Second, margin takes into account the total cost of the product, including shipping and other costs, while markup only considers the COGS. This means that margin is a more accurate measure of profit.

Third, your margin is more stable than markup. For example, if your COGS go up 10%, your margin will also go up 10%. However, if your markup is 10% and your COGS go up 10%, your markup will only go up to 11%. This means that your margin is less likely to fluctuate in response to changes in the market.

Finally, your margin is a better measure of profitability than markup. This is because margin considers the total revenue of the product, while markup only considers the COGS. This means that margin gives you a better idea of how much profit you’re actually making on a product.

What is a good profit margin for my ecommerce business?

There’s no simple answer to the question of what is considered a good profit margin for an ecommerce business. It depends on several factors, including the type of product or service you’re selling, your operating expenses, and the amount of competition in your market.

That said, as a general rule of thumb, most businesses aim for a profit margin of between 10 and 20%. If you’re selling more expensive products or services, your margin may be on the lower end of that range. If you’re selling lower-priced items, your margin may be on the higher end.

Of course, ultimately, the goal is to make as much profit as possible. So, if you can find ways to increase your margin while still providing a great product or service to your customers, you’ll be in good shape.

There are a number of strategies you can use to increase your profit margin. One is to focus on selling higher-priced items. Another is to reduce your operating expenses. And, of course, you can always try to negotiate better terms with your suppliers.

No matter what, though, remember that your goal should be to create a business that is sustainable and profitable in the long run. Don’t sacrifice long-term profitability for short-term gains. Focus on creating a solid foundation for your business, and the profits will follow.

What is the difference between gross and net profit margins?

In business, gross profit margin and net profit margin are two critical measures of profitability. Gross profit margin is a measure of a company’s overall efficiency in generating revenue, while the net profit margin is a measure of how much of that revenue the company actually keeps after all expenses are paid.

• Gross profit margin = (revenue – costs of goods sold) ÷ revenue
• Net profit margin = (revenue – all expenses) ÷ revenue

Generally speaking, a higher gross profit margin is better than a lower one, and a higher net profit margin is better than a lower one. However, it’s important to remember that these measures can be affected by a number of factors, including the industry in which a company operates, the mix of products and services it sells, and its overall business strategy.

A company with a high gross profit margin but a low net profit margin might be pricing its products too low, for example, or might be spending too much on marketing or other expenses. Conversely, a company with a low gross profit margin but a high net profit margin might be charging too much for its products or might be selling products with very low margins.

In short, gross and net profit margins are both necessary measures of profitability, but they tell different stories about a company’s business. A comprehensive analysis of a company’s financial statements will take both of these measures into account.

Can profit margin be too high?

When it comes to business, profit margins are everything. A high-profit margin means that a company is making a lot of money off of each sale and is therefore doing well financially. However, there can be such thing as a profit margin that is too high.

A business with a very high-profit margin may be viewed as greedy by consumers. This can lead to bad publicity. 

Martin Shkreli, a former pharmaceutical executive known for raising the price of a life-saving drug by 5,000%, faced significant public backlash and did jail time for raising the price of Daraprim, an antiparasitic medication often used by patients with suppressed immune systems. In addition to being required to forfeit the profits from the Daraprim price hike, the BBC and others dubbed him “the most hated man in America.”

Additionally, a business with a high-profit margin may be less likely to reinvest its profits back into the company, which can lead to stagnation.

Overall, a business needs to strike a balance when it comes to its profit margin. Making too much money off of each sale can be just as bad as making too little. Therefore, companies need to be mindful of how much profit they are making. They should not alienate their customers in the process.

Gross margin formula: how do you calculate profit margins?

There are a few different ways to calculate gross profit margins. The most common method is to take the total revenue from your company’s sales and subtract the cost of goods sold (COGS). This will give you your gross profit, which you can then divide by your total revenue to get your gross profit margin percentage.

For example, let’s say your ecommerce business had $100,000 in sales last month, and your COGS was $60,000. This means your gross profit would be $40,000 ($100,000-$60,000). To calculate your gross profit margin percentage, you would take your gross profit ($40,000) and divide it by your total revenue ($100,000). This example would give you a gross profit margin of 40%.

Gross margin formula: 

• Sales – COGS = Gross Profit Margin
• Gross Profit Margin ÷ Total Revenue = Gross Profit Margin Percentage

It’s important to note that your COGS should include all direct costs associated with production and selling. This includes things like raw materials, manufacturing costs, labor costs, shipping and handling, and any other direct costs.

How to calculate your net profit margin

One thing to keep in mind is that your gross profit margin isn’t the same as your net profit margin. Your net profit margin is your total profits (revenue minus all expenses) divided by your total revenue. So, if you had $100,000 in sales and your COGS was $60,000, but you also had $20,000 in other expenses (like marketing, rent, etc.), your net profit would be $20,000 ($100,000-$60,000-$20,000). This means your net profit margin would be 20%.

Analyzing the profit margin formula

You can use gross profit margins to compare your business to others in your industry. For example, if the average gross profit margin in your industry is 50%, but your business is only at 40%, that could be an indication that you need to reevaluate your pricing or find ways to reduce your costs.

Gross profit margins can also be a helpful tool for managing inventory. For example, if you know that your gross profit margin on a product is 50%, you can use that information to help you make decisions about how much inventory to keep on hand. If you have $10,000 worth of a product in inventory and your goal is to maintain a 50% gross profit margin, then you know that you need to sell the product for at least $20,000 in order to reach your goal.

FAQs about sales margins

Below you’ll find some of the most commonly asked questions ecommerce businesses ask us about their profit margins.

Are sales margin and profit margin the same?

Your sales margin and profit margin are not the same. Sales margin is the percentage of sales that is left after the cost of goods sold is deducted, while your profit margin is the percentage of revenue that is left after all expenses are deducted. In other words, your company’s profit margin is a measure of profitability, while its sales margin is a measure of how much of each sale is left after the cost of goods sold is deducted.

The sales margin is important because it measures how much of each sale is left after the cost of goods sold is deducted. This information can be used to make pricing decisions and evaluate the profitability of a business. Profit margin is important because it measures the amount of revenue that is left after all expenses are deducted. This information can be used to make decisions about how to allocate resources and assess the financial health of a business.

How do you calculate sales margin in excel?

Your sales margin is one of the most important financial metrics for businesses. It tells you how much profit you’re making on each sale and can be a key indicator of your company’s health.

Fortunately, calculating your company’s sales margin is relatively simple, especially if you’re using Microsoft Excel. Below, we’ll walk you through the steps to do just that.

1. First, you’ll need to create a new worksheet in Excel. 
2. Next, enter your sales data into the first column. This data can be pulled from your company’s accounting software or manually entered.
3. Once you have your sales data entered, you’ll need to calculate your cost of goods sold (COGS). This figure includes the cost of materials, labor, and any other expenses that go into producing your product or service.
4. You can find your COGS by reviewing your company’s financial statements or by speaking with your accounting department. Once you have your COGS figured out, divide it by your total sales revenue.

This will give you your sales margin percentage. To get your margin dollar amount, multiply your sales margin percentage by your total sales revenue.

For example, let’s say your company had $100,000 in sales last year, and your COGS was $60,000. This would give you a sales margin percentage of 40%. To get your margin dollar amount, you would multiply 40% by $100,000 for a total of $40,000.

This process can be easily automated in Excel using a simple formula. In the cell next to your last sales figure, enter the following formula: =SUM(COGS/sales revenue).

This will give you your sales margin percentage in that cell. To get your margin dollar amount, simply multiply that figure by your total sales revenue.

Calculating your sales margin is a crucial part of running a successful business. By using Excel, you can make this process quick and easy.

FAQs

Final thoughts

Margins are an important measure of success for any business and can be the difference between a thriving company and one that’s barely scraping by. 

Luckily, with a solid understanding of how to calculate margins and some thoughtful strategizing, you can make sure your ecommerce business has healthy profit margins and is on track for long-term success. 

If you want help getting started or would like more information on how to manage your inventory more efficiently to increase your profit margins, contact Linnworks. We’re here to help you boost your bottom line so you can focus on what you do best: running your business!