Discover the Profit Margin of Your Dropshipping Store
Profit Margin (also referred to as net margin, net profit margin, or net profit ratio) is a measure of the profitability of a service, business, or a product.
It’s calculated by finding the net profit as a percentage of the revenue. The higher the percentage, the more profitable the business.
Revenue is the income that a business has from its normal activities, usually the sale of goods and services to customers.
The difference between these two numbers is very important for business owners to know. To put it simply, gross revenue is the sum of all the revenues you earn.
Net revenue is gross revenue minus the costs associated with returned goods and sales discounts. Net revenue is what is left when all the costs have been taken out.
As an internet retailer, you’ll most often look at two types of profit margins: Net and Gross.
Gross profit margin normally applies to a specific product or line– rather than an entire business. Calculating your gross profit margin will help you determine pricing decisions.
A low gross profit might mean that your store needs to charge more to make selling a specific product “profitable”.
Subtract the cost of goods sold (COGS) from your net sales. Divide that number into the net sales to get the ratio (which represents the percentage).
Note: COGS includes only direct product costs and doesn’t factor in other business expenses such as hosting and supplies.
Unlike gross profit margins, net profit margins are a calculation that shows the profitability of an entire company– not just a single product.
Like gross profit margins, net profit margins are shown as a percentage. The higher the percent, the more profitable the company.
A low net profit margin might mean there are issues impacting profitability potential such as high expenses, management problems, and site usability.
It’s important to note that net profit margins are wildly different across different industries. So use caution when comparing your net profit margin to other businesses.
Divide your company’s net income (which is the profit after expenses are deducted from gross income) into your total sales. Then multiply that result by 100 to get the answer as a percentage.