Ecommerce Profit Margins Explained: What Each Sale Really Leaves Behind

You buy a product for £15 and sell it for £60. The orders are coming in, customers seem happy and the gap between buying and selling looks healthy. You would be forgiven for expecting the profit to look rather good too.

Then the other costs arrive. VAT takes its share of the selling price. The product needs delivering. The payment provider charges a fee, advertising needs paying and the business has salaries, software and other bills to cover. The £45 difference you started with gets smaller quite quickly.

This is why I want ecommerce founders to understand what each sale leaves behind. A good product margin gives the business an opportunity. The rest of the calculation tells you whether you can afford to acquire customers, support the operation and make a worthwhile profit.

The useful questions are practical. Can this product support more advertising? Is the discount worthwhile? Which channel earns the most? How much margin do you need before hiring or ordering more stock?

We will follow a £60 customer order through those decisions, separating gross margin, contribution and operating profit along the way.

Start with the selling price the business actually keeps

If you are VAT-registered and sell a standard-rated product for £60 including VAT, your sales revenue is £50. The other £10 is VAT charged on the sale. You remove 20% VAT by dividing the VAT-inclusive price by 1.2; subtracting 20% from £60 would give the wrong answer.

Use costs excluding VAT where that VAT is recoverable. Non-recoverable VAT remains part of the relevant cost. If you are not registered, the treatment differs because you do not charge VAT and normally cannot recover VAT on purchases. Use the correct treatment for your business and products.

For an established brand, calculate net sales after discounts and refunds, excluding VAT. Otherwise, a report showing full-price orders can give a more flattering impression than the sales the business ultimately retains.

This also matters when comparing your accounts with marketing reports. A campaign reporting £60 of sales and the accounts recording £50 may be describing the same order on different VAT bases. Agree the basis before deciding which report you prefer.

Gross margin: What remains after the product cost

Gross profit is sales revenue less cost of goods sold, often shortened to COGS. Gross margin expresses that profit as a percentage of revenue.

Using our example, £50 revenue less £15 product cost leaves £35 gross profit. Divide £35 by £50 and the gross margin is 70%.

The product cost needs to reflect what it took to get the item ready and into stock. A factory quote on its own is rarely enough for an imported product. Include relevant packaging, freight, duty and associated costs, with recoverable VAT excluded. This is the landed cost.

Suppose a shipment costs £12,000 from the supplier and another £3,000 to get into the warehouse. If it contains 1,000 saleable units, the landed cost is £15 each. Using the £12 factory price would overstate gross profit by £3 per unit, or £3,000 across the shipment.

Where a shipment contains different products, allocate shared costs on a sensible basis. Dividing freight equally between a small accessory and a much larger item may distort both margins. Use information that reflects what drives the cost, such as weight, volume or the actual supplier charge.

Check what the report includes in COGS

For the examples in this guide, COGS means the landed cost of the goods sold. We show fulfilment and other selling costs separately. Some accounting reports include certain fulfilment or other direct costs within cost of sales instead. Understand the classification before comparing gross margins across reports or businesses.

Stock purchases also need separating from stock sold. Buying 2,000 units and selling 500 does not make the cost of all 2,000 an expense against those 500 sales. Unsold stock normally remains an asset, subject to appropriate valuation adjustments. Unreliable stock records can therefore make the reported margin wrong even when the sales figures are correct.

Margin and markup answer different questions

Margin measures profit against the selling price. Markup measures the amount added to cost. If something costs £20 and sells for £30 excluding VAT, the markup is 50%, but the gross margin is 33.3%: £10 profit divided by £30 revenue.

Confusing the two can leave a product priced below the margin you intended. Check the calculation before building a purchasing or advertising plan around it.

Contribution: What the order leaves after selling it

Gross profit gives you the starting room in the sale. Next come the costs of winning and fulfilling the order.

For our £60 customer payment, assume £15 landed product cost, £10 for fulfilment, delivery, payment fees and expected additional returns costs, and £10 advertising allocated to the order. Costs exclude recoverable VAT.

The sale has a 70% product gross margin and a 30% contribution margin after advertising. That £15 helps pay the operating overheads and produce profit.

Define contribution clearly when discussing it. A marketing report might show contribution before advertising, while another report shows it afterwards. Here, the distinction is the difference between £25 and £15. Both are useful, provided everyone knows what has already been paid for.

Include costs consistently. If delivery is charged separately to the customer, include that revenue and the associated delivery cost on the correct VAT basis. If a marketplace fee already includes a service, avoid adding it again. A fixed monthly agency retainer also needs accounting for, even if it is shown in overheads rather than allocated to orders.

For returns, reduce sales for refunds and record the additional unrecovered costs, such as handling, wasted delivery or damaged goods. Do not deduct the same refunded revenue again through a returns-cost allowance. The table illustrates a retained sale with an allowance for additional costs across the wider order mix.

Operating profit: What remains after running the business

Multiply the order example across a month. Suppose the business retains 1,000 orders at £50 revenue excluding VAT, with the same average costs and contribution.

That gives £50,000 revenue and £15,000 contribution after product costs, the other variable selling costs and advertising. If monthly operating overheads are £5,000, operating profit is £10,000: a 20% operating margin.

Those overheads should include the relevant salaries, software, premises, professional fees, marketing retainers and other operating costs not already allocated. Depreciation also affects operating profit. Finance costs and Corporation Tax come afterwards when moving towards profit after tax.

This is where the apparently excellent 70% gross margin has become a 20% operating margin. The money in between has paid for the work needed to turn a product into a functioning business.

Allow for the founder's work

A small brand can look highly profitable while the founder handles purchasing, packing, marketing and customer service for very little pay. That may be a deliberate early-stage choice. It does not show what the operation would earn with those jobs properly resourced.

Include actual salary costs in the accounts and consider realistic remuneration when planning the next stage. Dividends are distributions of available profits, rather than operating expenses. A founder taking dividends instead of a salary may still need a commercial allowance for the work they perform when assessing the business model.

If employing someone to take over part of the role would remove most of the current profit, you have found a growth question to resolve. Can pricing, contribution or sales volume support the operation you want to build?

What profit margins should an ecommerce brand target?

For the own-brand model discussed in our wider guide, my starting target is a landed product cost around 20–30% of revenue excluding VAT. On a £50 net sale, that means £10–£15 for the product into stock, leaving a 70–80% product gross margin before the other selling costs.

My paid-advertising target is around 10–20% of net revenue: £5–£10 on that same £50 sale, on average. Keep agency fees and other marketing costs visible alongside it. This ratio measures spend against sales across the period; it is not automatically the cost of acquiring each new customer.

I also want the plan to show a route towards 20–30% operating profit before finance costs and Corporation Tax, including realistic overheads and founder remuneration. These are commercial targets for this model, rather than claims about industry averages. A reseller or a bulky, expensive-to-deliver product needs its own economics.

Work backwards from the intended profit. At £50 net revenue, a 20% operating margin means retaining £10. If product cost takes £15 and advertising takes £10, the remaining £15 must cover fulfilment, delivery, fees, returns and overheads. The target now has a practical test attached to it.

A low product cost creates room. You still have to make the customer acquisition and operation work within that room.

How small changes can take a large share of the profit

The margin becomes more useful once you start changing the assumptions. Take the same order, with £50 net revenue, £15 product cost, £10 other variable selling costs and £10 advertising. It contributes £15. At the original volume, allocating £5 of operating overheads per order leaves £10 operating profit.

The table changes one assumption at a time. It holds the other costs and order volume constant so you can see the effect before considering how customers or costs might respond.

The discount is worth a closer look. A 10% reduction in price takes a third of the contribution and halves operating profit at the original volume. Across 1,000 orders, monthly operating profit falls from £10,000 to £5,000.

To restore the original £10,000 profit with £5,000 fixed overheads, you need £15,000 contribution. At £10 per discounted order, that requires 1,500 orders: 50% more than before. That assumes the extra volume does not bring extra overheads, higher acquisition costs or a different returns pattern.

A promotion can still justify itself by clearing ageing stock, increasing basket contribution or generating valuable repeat customers. Give it an objective and calculate the return. More orders alone do not tell you whether it worked.

The price increase also deserves attention. Adding £3 to net revenue means a standard-rated consumer price of £63.60 rather than £60. Under the table's assumptions, operating profit per order rises from £10 to £13. Test what happens to conversion and sales volume, and update any percentage-based fees. A price change needs a market response as well as a margin calculation.

At 1,000 orders a month, improving contribution by £1 per order adds £1,000 before any additional overheads. On £50,000 revenue, that is two percentage points of operating margin. Small improvements to packaging, returns, delivery or pricing can therefore be worth proper attention.

Use the margins to decide what to improve next

Start with the weakest part of the calculation. If product cost leaves too little gross profit, look at achievable price, supplier terms, specification and landed costs. Reducing quality to meet a cost target can create larger losses through refunds and poor reviews, so assess the full effect.

If gross margin is strong but contribution is weak, investigate fulfilment, fees, discounts, returns and customer acquisition. Compare by product and channel. The same item can earn a different contribution on Amazon, your own website or a wholesale order because the selling price and costs differ.

ROAS belongs in this discussion, but it cannot replace the contribution calculation. A £50 net sale generated by £10 ad spend has a 5x ROAS. Whether it earns enough depends on the other costs. Keep the accounting and marketing reports on a consistent VAT and refunds basis, then assess the additional contribution from any proposed increase in spend.

If contribution is healthy but operating profit disappoints, look at the overheads and the sales volume needed to support them. With £5,000 monthly overheads and £15 contribution per order, the business needs 334 orders to cover those overheads, rounding up to whole orders. A new hire, software contract or agency retainer changes that break-even point.

Sometimes the right decision is to invest and accept a lower margin while capacity is built. Put a timetable and expected return behind it. The business should know what the investment is intended to improve and how it will assess the result.

Review the whole month, as well as the successful order

Use actual net sales, stock movements, selling costs and overheads to reconcile the month's result. The worked order is a model; the accounts need to capture the full mix of orders, promotions, returns and costs.

Check that discounts and refunds have reached the figures, landed costs are current, stock records are dependable and marketing costs are included once. Review older or damaged stock for appropriate write-downs. A product cost that was accurate six months ago may no longer describe what the latest batch earns.

Keep profit after tax distinct from operating profit. Interest and Corporation Tax reduce what remains, and the tax calculation may differ from accounting profit. When someone quotes a “net margin”, establish whether they mean profit after tax or are using the term loosely for contribution after advertising. Those are very different results.

Finally, profitable sales still need funding. A stock deposit, loan repayment or tax payment can reduce cash without being an operating expense in the same period. Our guide Ecommerce Cash Flow: How to Plan Stock Purchases Without Running Short works through that purchasing and payment timetable. Use it alongside the margin calculation before committing to a larger order.

Conclusion: Know what the next sale should earn

A useful margin calculation follows the whole transaction: the price the business retains, the cost of the product, the cost of selling it and the operation those sales need to support.

Start with your strongest-selling product and build that calculation using actual costs. Compare it with the targets, test the next discount or advertising increase and identify what would improve the return. Then check the wider month's figures to make sure the successful-looking order is translating into business profit.

At COPA, we use ecommerce founders' existing accounts, store and advertising figures to discuss pricing, product performance and affordable growth. If sales are moving but you are less certain about what they earn, speak to us about your ecommerce business. Bring the product or spending decision you want to understand. That gives the numbers a useful job to do.