The business is busier than it has ever been. More orders, bigger stock purchases, another person helping with customer service. You are spending more on advertising because the opportunity looks good, and the revenue chart is heading in the right direction.
Then the accounts arrive. Profit has barely moved. Perhaps it has gone backwards.
It is a frustrating place to be. You have taken on more work, more commitments and more risk without much more to show for it. The natural response is often to push sales harder, hoping the extra volume will eventually make the numbers work.
Sometimes more volume helps. But if each new order leaves too little, or the business adds costs faster than it adds contribution, selling more can make the problem larger.
The useful question is where the additional revenue is going. Discounts, advertising, product costs, fulfilment, returns and overheads can each take a share. Individually, the changes may look manageable. Together, they can account for most of the profit you expected to make.
Before you increase the next budget or commit to another shipment, follow the money through the business. The warning signs below give you a practical place to start.
Establish which profit has stopped growing
Be clear about what you are comparing. Gross profit is what remains after the cost of products sold. Contribution takes off the relevant costs of generating and fulfilling those sales. Operating profit also allows for the business’s operating overheads, before finance costs and Corporation Tax.
Your accounting layout may classify some costs differently. Agree the definitions and use them consistently. A rising gross profit can coexist with falling operating profit if advertising, fulfilment or staffing costs have increased.
Separate pounds from percentages too. Moving from £20,000 profit on £100,000 of sales to £25,000 on £150,000 means profit has increased, while the margin has fallen from 20% to about 16.7%. That may be a worthwhile trade if the growth is sustainable and funded. It deserves a different response from sales increasing while the actual profit falls.
Use net revenue after discounts and refunds, excluding VAT, and compare sensible periods. Look at the same season last year, recent monthly trends and the original plan. One month containing a planned launch cost is different from six months of deteriorating performance.
The extra revenue is being absorbed by extra costs
Suppose a brand grows monthly net revenue from £100,000 to £150,000. Here is an illustrative comparison, with landed product costs separated from fulfilment and selling costs so the movement is easy to see.
| Monthly performance | Earlier month | Later month |
|---|---|---|
| Net revenue | £100,000 | £150,000 |
| Landed cost of products sold | £25,000 | £43,500 |
| Fulfilment, delivery and selling fees | £10,000 | £17,000 |
| Total marketing costs | £20,000 | £35,000 |
| Other operating overheads | £25,000 | £39,500 |
| Operating profit before finance costs and Corporation Tax | £20,000 | £15,000 |
| Operating profit margin | 20% | 10% |
The extra £50,000 of revenue brought £55,000 of extra costs. Product costs increased by £18,500, fulfilment and selling costs by £7,000, marketing by £15,000 and overheads by £14,500.
There may be several explanations. The sales mix could have shifted, a supplier increased prices, or the business hired ahead of demand. The point is to establish which changes are deliberate and which have happened without enough attention.
Start with the biggest movements in pounds, then examine costs as a percentage of net revenue. A large percentage increase in a £100 software subscription is less urgent than another £5,000 disappearing into acquisition costs every month.
Discounts are making orders look better than they are
Discounting is an easy way to get a response. It is also an easy way to surrender more contribution than the headline percentage suggests.
Take a product selling for £50 excluding VAT. Its landed cost is £15, fulfilment and selling fees are £8, and advertising costs £10 per order. That leaves £17 before other overheads and any additional costs not included in the example.
A 10% discount reduces revenue to £45. Holding the other costs unchanged to isolate the effect, contribution falls to £12. Revenue per order fell by 10%, but contribution fell by about 29%.
You now need roughly 42% more orders to produce the same total contribution. A campaign generating 20% more orders would still leave less contribution under those assumptions, while creating more parcels, more stock demand and more customer queries.
The discount may improve conversion or lower acquisition cost enough to work. A bundle may increase contribution per order even with a lower margin percentage. Check the actual outcome rather than assuming either strategy is profitable because revenue increased.
Compare contribution before and after the promotion, using the actual selling prices, acquisition costs and fulfilment costs. Also ask whether customers are bringing purchases forward or waiting for the next offer. A promotional calendar can become remarkably busy when nobody wants to pay the normal price.
Advertising still generates sales but leaves too little profit
ROAS measures reported revenue against advertising spend. It does not, by itself, show what the business earned after product costs, delivery, fees, returns and the rest of the marketing bill.
For example, a campaign reports £12,000 of sales from £3,000 of advertising: a four-times ROAS. Assume the reported revenue includes 20% VAT and there are no refunds in this simplified example. The net revenue is £10,000.
If landed product costs are £3,000, fulfilment and selling costs £2,200, and associated agency and creative costs £800, only £1,000 remains after the £3,000 advertising spend. That is before the operating overheads the campaign needs to help fund. The dashboard may be pleased. The accounts are entitled to ask a few more questions.
Check what revenue the platform uses, how refunds are reflected and whether different platforms are claiming the same order. Reported attribution also does not prove that every sale would have been lost without the advert.
My target for a scalable own-brand model is paid advertising around 10–20% of net revenue: £5–£10 on a £50 sale excluding VAT. Keep agency and creative costs visible alongside it. In this campaign example, advertising alone takes 30% of net revenue, so it needs particular scrutiny.
Review the additional contribution generated by additional spend. A blended account-wide ratio can stay respectable because existing customers keep buying, while the latest campaign struggles to acquire new customers profitably.
Repeat purchases can justify a higher initial acquisition cost. They need to be evidenced, with a realistic payback period and enough cash to fund the wait. “They will come back” is a prediction, not a receipt.
The product costs more than your pricing model allows
A supplier price that looked comfortable at launch can gradually stop representing the actual cost of the product. Freight changes, duty, packaging, currency movements and quality issues all deserve attention.
Use landed costs for the units sold, excluding recoverable VAT. Compare the latest batches with the assumptions used to set prices. If the cost has moved from £12 to £15, selling 2,000 units a month now produces £6,000 less gross profit at the same selling price, before any other changes.
Larger orders may reduce the factory price but increase the financial exposure. A saving on each unit is less attractive if the order includes more products than you can reasonably sell, or the quality problem only becomes apparent after the larger shipment arrives.
Check product-level costs rather than relying only on the business average. Consider supplier terms, packaging, purchasing volumes and the achievable price customers will pay. Changing the product or offer may do more than asking the supplier for another small reduction.
Do not assume a platform’s profit report has captured all this automatically. Shopify’s standard gross-profit reporting depends on the product costs recorded at the time of sale, and products without those costs may be absent. Reconcile the commercial analysis to the accounts and understand what the report includes.
Growth is coming from the wrong products or channels
Your original bestselling product may still have a strong margin, but it may now represent less of the business. A lower-margin range or more expensive channel can pull the overall result down without changing that original product at all.
Compare contribution by main product, channel and market. Include the costs associated with each route: marketplace fees, advertising, delivery, promotions, returns and any additional support or compliance costs.
A Shopify order avoids some marketplace charges but still needs acquiring and fulfilling. Wholesale can offer volume and fewer individual deliveries, but a lower selling price and customer payment terms change the calculation. Overseas sales may introduce a much higher cost to serve than the UK orders you are used to.
Look at total contribution in pounds alongside the margin percentage, and allow for the cash committed. A lower-margin channel can be valuable if it produces dependable contribution with manageable demands. A fast-growing one that consumes the team’s time and needs repeated cash injections deserves a closer look.
Expanding into another market will not automatically fix an offer that already struggles to leave a profit in the UK. Establish which part of the model the expansion improves before funding it.
Delivery problems and returns are quietly undoing the sale
It is easy to notice a rise in advertising spend. The cost of an unreliable operation can be more scattered: replacement parcels, expedited deliveries, refunds, customer-service hours, damaged goods and lost repeat orders.
Review fulfilment and delivery cost per order, the reasons for returns and refunds, and complaint trends by product or supplier batch. If a high-volume line generates a disproportionate number of replacements, its apparent margin may be flattering it.
An additional £2 of avoidable cost across 3,000 orders is £6,000 a month. Finding the recurring cause can offer a better return than negotiating a few pence off a courier rate.
Customer reviews matter here as well. Late deliveries and poor handling of problems can make the product harder to sell, affecting conversion and acquisition cost as well as the cost of putting things right. Compare the promised delivery experience with what customers actually receive.
Keep the accounting consistent. Refunds should reduce revenue; return delivery, irrecoverable stock and handling can create additional costs. Do not charge the full refund again as an expense if it has already reduced sales. Equally, do not overlook the extra costs simply because the refund was recorded correctly.
A cheaper fulfilment arrangement only saves money if the overall service supports the business. Look at the full cost of each successful, satisfactory delivery.
Overheads have increased before the contribution can support them
Growing brands need people, systems and operational capacity. Some investment has to happen ahead of the sales it will support. The warning sign is an increasing monthly cost base without a clear view of how it will be funded or what improvement it should deliver.
Suppose a new hire costs £6,000 a month in total employment costs. At a 30% contribution margin, the business needs £20,000 of additional monthly net revenue just to cover that cost, assuming the existing operation and other costs remain unchanged.
The hire may still be the right decision. They might remove a capacity constraint, improve customer retention or allow the founder to develop the business. Decide what they need to achieve and when you will review it. The salary does not become affordable merely because the team feels busy.
Apply the same reasoning to software, agencies, premises and other recurring commitments. A few sensible decisions made separately can produce an overhead bill nobody intended to approve as a whole.
Include realistic founder remuneration when assessing the underlying return. A business that only looks highly profitable because its founder works full time for very little has another cost to recognise before it can operate independently.
VAT or inconsistent accounts have changed the picture
VAT registration can expose a pricing model that never had enough room. For a standard-rated product, keeping a £60 customer price after registration leaves £50 of revenue and £10 of output VAT. The £60 is no longer all sales income.
Eligible input VAT recovery can offset some of the effect, so model the full change rather than simply deducting 20% from the previous profit. Compare a price rise, absorbing some of the effect and changes to costs, using what customers are likely to accept.
For a UK-established business, compulsory registration normally applies when taxable turnover exceeds £90,000 in a rolling twelve-month period, or is expected to exceed £90,000 in the next thirty days alone. Different rules can apply to overseas businesses.
Also check whether the apparent profit movement is reliable. Missing marketplace fees, incorrect stock figures, late supplier bills or freight charged to the wrong period can distort the comparison. Do not cut a profitable campaign to solve a bookkeeping error.
Get reconciled monthly accounts with the important costs in the right period. That gives you a sound starting point for deciding what actually needs fixing.
The business is profitable but its cash is tied up in stock
If the real concern is the bank balance, distinguish that from declining profit. An order can be profitable while the next shipment needs paying for before customers have bought the current one.
A business making £20,000 of operating profit can still use cash overall if it adds £40,000 of fully paid stock to inventory, before allowing for tax and other movements. That does not automatically mean the sales model is unprofitable. It means the growth needs funding and the stock needs to earn its return.
Check stock ageing, committed purchase orders, supplier payment dates and the likely selling time. Use a rolling thirteen-week cash forecast, roughly the next three months, alongside a monthly view of the year. Include a slower-sales case.
Borrowing may help fund a good order with a credible return. It will not repair contribution that is consistently too weak to support the business.
Decide whether the lower profit is planned or becoming a habit
A launch, a new channel or investment in capacity may temporarily reduce profit for good reasons. Set a budget, identify the result you expect and agree when you will review it.
For example, a three-month channel test could have a defined maximum loss and targets for acquisition cost, contribution and repeat demand. At the review, decide whether the evidence supports continuing, changing the approach or stopping. The phrase “still investing in growth” needs to refer to something more specific than the date moving forward.
Prioritise fixes by their likely financial effect, the effort involved and the cash needed. A pricing correction or recurring fulfilment error may offer a quicker improvement than a new product launch. Avoid changing everything at once if that makes it impossible to tell what worked.
I would finish the investigation with answers to four questions:
- Which products, customers or channels generate dependable contribution?
- Where did the biggest deterioration occur, and what caused it?
- Which change should improve profit, by roughly how much, and who will make it happen?
- Does the cash forecast allow us to carry out that plan and meet existing commitments?
My preferred own-brand model leaves landed product costs around 20–30% of net revenue, paid advertising around 10–20%, and operating profit around 20–30% before finance costs and Corporation Tax, with realistic overheads. These are commercial targets to build towards, rather than industry averages. If the model cannot support them, understand what return it can achieve and whether that justifies the work, risk and capital.
Make the extra sales worth having
Strong demand is an opportunity. The financial work is making sure the business keeps enough from those sales to reward the founder and fund the next stage.
You do not need to stop growing because the margin has slipped. You do need to know why it slipped and whether the next batch of orders will improve the position or repeat the same problem at a larger scale.
At COPA, we help ecommerce founders connect sales, product margins, marketing, stock and cash so they can identify what needs attention. Speak to us about your ecommerce business, and we can help you understand where the profit is going and what to review next.