Thread by @SCHM7DT

PROFIT MARGINS IN E-COMMERCE

Margins are incredibly important in ecom and very few fully understand them

Here’s everything you need to know about e-commerce profit margins

THREAD

There’s 2 types of margins. Gross margin and net margin

Gross margin = margin on the product alone

Net margin = margin on everything (i.e. total profit)

The calculations

Gross margin = (Sale price - product cost) / sale price

Net margin = (Revenue - expenses) / revenue

Sell a product for $49 that costs you $14?

($49 - $14) / $49 = 0.71

That’s a 71% gross margin

Gross margin is extremely important because if it’s too low your business is doomed from the start

A common rule of thumb is to shoot for a 3x markup on your product costs (if you get it for $14 need to be able to sell it for at least $42)

That’s equivalent to a 67% gross margin

This is the bare minimum gross margin needed to sell a product

Generally we shoot for 70-80% gross margins (closer to 80% the better)

A 4x markup is 75% so that’s usually a good benchmark to shoot for

Buy it for $10? Sell it for $40

Why do we need so much margin?

Because product costs (i.e. COGS) are only one expense

We also need to cover all other expenses and still have some profit leftover

This is where net margin comes in ↓

Net margin is the percentage of profit leftover after paying all expenses

• Product costs
• Shipping costs
• Ad costs
• Payment processing costs
• Refunds
• Etc.

Ideally you want to get as close to 40% net margin as possible

Bad margins: 0-15%
Average margins: 15-25%
Good margins: 25-35%
Great margins: 35%+

This brings us to another very important metric

Breakeven ROAS

ROAS (return on ad spend) is how much revenue you’re making for each dollar you spend on ads

The calculation

ROAS = Revenue / ad spend

Spend $100 on ads to make $250 in revenue?

$250 revenue / $100 ad spend = 2.5 ROAS

BREAKEVEN ROAS is the ROAS that you’re breaking even at

If your ROAS is above BE ROAS? Profitable

Below BE ROAS? Unprofitable

This is an extremely important metric to know because it’s different for every product

The calculation

Break-even ROAS = 1 / gross margin %

If your gross margin is 75% (like it would be if you had a 4x markup)

1 / 0.75 = 1.33 BE ROAS

This means you only need to make $1.33 in revenue from every $1 of ad spend to break even

On the other hand if you have shotty margins, say 50% gross margins (i.e. buy for $14 sell for $28)

1 / 0.50 = 2 BE ROAS

In this case you’d just be breaking even at a 2 ROAS, whereas in the above example you’d be making solid profit

The lower your break-even ROAS = the better

TL;DR

Margins in ecom are extremely important

Know and understand the calculations for

• Gross margin
• Net margin
• ROAS
• Break-even ROAS

And ALWAYS know your numbers for the product you’re running

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