What Are Good E-commerce Profit Margins?
E-commerce has become a popular way for businesses to sell products and services online. However, like any business, e-commerce must generate profits to survive and grow. E-commerce profit margins are a measure of how much profit a business makes on each sale. In this blog, we will explore what good e-commerce profit margins are, how they can be calculated, and what factors can affect them.
What are good e-commerce profit margins?
Good e-commerce profit margins vary by industry and business model. Generally, a good e-commerce profit margin allows a business to cover its costs and make a reasonable profit. According to a report by Shopify, e-commerce businesses with profit margins of 10% or higher are considered good. However, some industries, such as software and digital products, can have much higher profit margins.
How to calculate e-commerce profit margins?
To calculate e-commerce profit margins, you must subtract the cost of goods sold (COGS) from
the revenue and divide the result by the revenue. The formula looks like this:
Profit margin = (Revenue – COGS) / Revenue
For example, if an e-commerce business generates $10,000 in revenue and has COGS of
$6,000, the profit margin would be: ($10,000 – $6,000) / $10,000 = 0.4 or 40%
Real-life examples of good e-commerce profit margins
Let’s look at some real-life examples of good e-commerce profit margins in different industries:
● Clothing and fashion: According to a report by Fashion United, clothing and fashion
e-commerce businesses can have profit margins ranging from 8% to 15%.
● Software: Software as a Service (SaaS) companies can have very high-profit margins
due to low overhead costs. For example, Dropbox has a profit margin of 29%.
● Food and beverage: According to a report by McKinsey, food and beverage e-commerce
businesses can have profit margins ranging from 5% to 10%.
Factors that affect e-commerce profit margins
Several factors can affect e-commerce profit margins, including:
● Overhead costs: E-commerce businesses must pay for website hosting, payment
processing, and shipping costs, which can eat into profits.
● Competition: E-commerce is a crowded space, and businesses must compete with many
other businesses to sell products.
● Pricing: If e-commerce businesses price their products too low, they may not generate
enough profit to cover their costs.
Tips for improving e-commerce profit margins
There are several ways e-commerce businesses can improve their profit margins:
● Increase prices: E-commerce businesses can increase their prices to generate more
revenue per sale.
● Lower unit purchase costs: E-commerce businesses can negotiate better deals with
suppliers to lower their COGS.
● Cross-selling and upselling: E-commerce businesses can increase their revenue per
sale by offering related products or upgrades.
While e-commerce profit margins are crucial for the success of any e-commerce business, a
good e-commerce profit margin varies by industry and business model but normally falls within
the 10% or higher range. E-commerce businesses can improve their profit margins by
increasing prices, lowering unit purchase costs, and cross-selling and upselling. By focusing on
improving profit margins, e-commerce businesses can ensure their long-term viability and
success in the online marketplace.
