Gross Margin
Gross margin is the percentage of revenue remaining after subtracting the cost of goods sold. It is the foundation of every profitability decision an ecommerce seller makes.
What is Gross Margin?
Gross margin is calculated as (Revenue − COGS) ÷ Revenue × 100. If you sell a product for $40 and it costs $12 to manufacture and ship to your warehouse, your gross margin is 70%. This percentage represents the revenue available to cover operating expenses (advertising, platform fees, salaries, fulfilment) and generate net profit.
For ecommerce sellers, 'contribution margin' is often more useful than pure gross margin because it accounts for variable costs beyond COGS — including FBA fees, transaction fees, and variable packaging costs. A product with 70% gross margin but 20% FBA fees, 4% payment processing, and 3% packaging has a contribution margin closer to 43%.
Gross margin varies enormously by category: software and digital products often achieve 80–95%; fashion 50–70%; electronics 20–35%; grocery 15–25%. Understanding your category's typical gross margin is essential for evaluating whether a business or product opportunity is worth pursuing.
Why it matters for sellers
Gross margin is the single number that determines whether your business model is viable. A seller with 15% gross margin who spends 20% of revenue on advertising is structurally loss-making — no amount of scale will fix that math. A seller with 60% gross margin has far more headroom for customer acquisition, returns, and operational costs.
Gross margin also determines your CAC ceiling. If gross margin is 40% and AOV is $50, you have $20 gross profit per order to work with. Once you subtract fulfilment and platform fees, your maximum sustainable CAC might be $8–12. Knowing this number stops you from overpaying for customers in paid channels.
How to use Gross Margin
Calculate gross margin for every SKU individually, not just your average. Some SKUs in your catalogue are margin-positive; others may be negative after all variable costs. Rank your products by contribution margin and focus marketing spend on the top quartile.
Review gross margin quarterly. COGS creep — small increases in component costs, freight rates, or packaging materials — erodes margin silently. A 2% COGS increase on a 30% gross margin product is a 6.7% margin reduction. Set alerts when supplier costs change and immediately update your margin models.
Real-world example
A supplement brand calculates contribution margin per unit: $45 selling price − $8 COGS − $7.20 FBA fee − $1.80 packaging = $28 contribution per unit (62% margin). With a $28 contribution, they can afford a $14 ACoS per unit and still hit their 31% net margin target. This calculation shapes every bid and promotion decision.
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Frequently asked questions about Gross Margin
What is a good gross margin for ecommerce?
50%+ is considered strong for physical goods ecommerce, giving enough room to cover fulfilment, advertising, and overhead while generating profit. Below 30% is challenging unless operating costs are extremely lean. Digital products and SaaS often achieve 80%+ gross margins.
What is the difference between gross margin and net margin?
Gross margin subtracts only COGS from revenue. Net margin subtracts all costs — COGS, operating expenses, advertising, platform fees, salaries, and taxes. Net margin is what you actually keep. A business with 60% gross margin and 25% net margin is spending 35% of revenue on operating costs.
How do I improve gross margin?
The main levers: negotiate lower COGS with suppliers (volume commitments, payment terms), optimise product dimensions and weight to reduce FBA or shipping fees, move production offshore if quality is maintained, eliminate slow-moving SKUs that inflate overhead allocation, and raise prices if elasticity allows.