Net Margin as the Truth Test
Net Margin is the most honest metric - it shows what truly remains.
Net Margin (also Net Profit Margin) is the ultimate metric for e-commerce profitability. It shows what percentage of revenue remains as profit after deducting all costs - including cost of goods sold, marketing, staff, rent, interest and taxes.
The difference to other margin metrics
While Gross Margin only deducts product costs and Contribution Margin considers variable costs, Net Margin goes all the way. It accounts for all costs:
- 1 Cost of Goods Sold (COGS): The direct costs of products sold.
- 2 Operating Expenses: Marketing, staff, software, rent, shipping.
- 3 Interest: Costs for debt and financing.
- 4 Taxes: Corporate and business taxes.
A store with $1 million in revenue and 5% net margin generates $50,000 net profit. At 10% net margin, it would be $100,000 - double the profit on the same revenue.
Why Net Margin is often low in E-Commerce
E-commerce businesses typically have lower net margins than traditional retailers. The reasons:
- 1 High marketing costs: Performance marketing, especially via Google and Meta, often consumes 20-30% of revenue.
- 2 Free shipping: Competition forces many stores to absorb shipping costs.
- 3 High return rates: Especially in fashion, returns destroy margins.
- 4 Price transparency: Customers compare prices online, compressing margins.
How to improve your Net Margin
Net Margin can be optimized through two levers: more revenue with the same fixed costs (scale effects) or cost reduction at the same revenue. Specific measures:
- 1 Increase AOV: More revenue per order reduces relative shipping and acquisition costs.
- 2 Boost repeat purchase rate: Existing customers are cheaper than new ones.
- 3 Automate processes: Reduce manual work through software and automation.
- 4 Improve marketing efficiency: Focus on channels with the best ROAS.
Use Net Margin together with the Break-Even Point to understand when your business becomes profitable.