How to Calculate Profit Margin

There are three profit margins, they answer different questions, and mixing them up leads to bad pricing decisions.

There's also one specific arithmetic mistake — confusing markup with margin — that quietly underprices a genuinely large number of stores. Let's deal with that one first, because it's the most expensive.

Markup vs margin: the mistake

They are not the same number, and the gap widens as prices rise.

Markup is measured against your cost. Margin is measured against your selling price.

A product costs you $50 and you sell it for $75.

Markup = ($75 − $50) ÷ $50 = 50%
Margin = ($75 − $50) ÷ $75 = 33.3%

Same product, same money, two very different numbers.

Here's how it costs you: an owner decides they need "40% margin", applies a 40% markup to a $50 cost, and prices at $70. Their actual margin is 28.6%. They're more than eleven points below where they thought they were — on every unit, for as long as that price stands.

The rule: margin is always the smaller number. If your calculation gives you the bigger one, you've calculated markup.

To convert: margin = markup ÷ (1 + markup). A 50% markup is a 33.3% margin.

The three margins that matter

Gross margin

Gross margin % = (Net revenue − COGS) ÷ Net revenue × 100

Uses landed cost — product plus freight in, duty and customs. Not the supplier invoice.

Answers: does this product work at all?

Most ecommerce stores need 50%+ gross margin to survive once everything else is paid for. Below 40% it's very hard to make the rest of the model work.

Contribution margin

Contribution margin = Gross profit − variable costs
                      (payment fees, shipping, ad spend)

Answers: does one more sale make me better off?

This is the most useful number in ecommerce and the least-calculated. It's what tells you whether scaling helps. If contribution margin is negative, growth actively destroys the business — you're buying revenue with money.

Net margin

Net margin % = (Contribution margin − fixed costs) ÷ Net revenue × 100

Fixed costs being apps, software, salaries, rent, insurance.

Answers: is the business viable?

Which one should I use for pricing?

Contribution margin — because pricing decisions are decisions about whether an additional sale is worth making.

Work backwards. Decide the contribution margin you need, then add up every variable cost, then set the price that gets you there.

For a product costing $20 landed, with roughly $8 shipping, $2 payment fees and $10 of ad spend per sale, you have $40 of variable cost. Price it at $50 and your contribution margin is $10 — 20%. Whether that's enough depends on your fixed costs, but at least it's the real number.

Pricing off gross margin alone hides the $18 of shipping and ads entirely, which is how products that look fine on paper lose money in practice.

What margin should I be aiming for?

It varies by category, but as rough orientation for ecommerce:

Margin	Reality
Gross	50–70% typical; under 40% is difficult
Contribution	20–40% is healthy
Net	10–20% is a good ecommerce business

Swipe to see more →

If your net margin is 5%, a small increase in courier rates or ad costs wipes it out. Thin margins aren't just less profit — they're less resilience.

The two inputs people get wrong

Landed cost, not invoice cost. Freight, duty, customs and currency conversion belong in COGS. Skipping them overstates gross margin by 15–30% in most importing businesses.

Actual shipping, not charged shipping. The gap between what the courier charged you and what the customer paid is a real cost. With free shipping over a threshold, it can be the largest single hidden cost in the business.

Get either wrong and every margin below it is wrong too.

Doing it continuously

The formulas are simple. The hard part is that they need current numbers from four places — Shopify, your supplier costs, your courier, and your ad platforms — and they change constantly.

Which is why most owners calculate margin once, when they set a price, and never again. Meanwhile supplier prices creep, courier rates rise, and ad costs climb. A product priced for 35% margin two years ago might be at 18% now, and nothing would have told you.

That's the gap Rev Room fills for NZ and Australian Shopify stores — pulling all four sources together so gross, contribution and net margin stay current rather than being a snapshot from whenever you last had a spare afternoon.

The short answer

Markup ≠ margin. Margin is always the smaller number
Gross margin tests the product; contribution margin tests scaling; net margin tests the business
Price using contribution margin — it's the only one that includes shipping and ads
Use landed cost and actual shipping, or every margin below is wrong
Recalculate periodically; margins decay quietly

General information only, current as at 20 August 2026. Figures are illustrative.