Calculating profit for your online store? Here’s what you need to know.
What is Gross Profit?
Gross profit, also known as gross income or gross margin, refers to the revenue left over after deducting the cost of goods sold (COGS) from the total revenue generated. In simpler terms, it represents the amount of money a business makes from selling its products or services, excluding any expenses directly associated with production or delivery.
Calculating gross profit is essential for understanding the efficiency of a business’s core operations. It helps determine how much profit is generated solely from the sale of products or services, without considering other expenses that are not directly tied to production.
For example, let’s say an eCommerce business sells handmade jewelry. The total revenue generated from selling these products is $10,000. However, the cost of materials and labor required to create these jewelry pieces amounts to $4,000. By subtracting the COGS from the total revenue, we can calculate the gross profit, which in this case would be $6,000.
What is Net Profit?
Net profit is the amount of money that remains after deducting all expenses and taxes from a company's revenue. It represents the actual profit earned by the business and is often used as a measure of its financial performance. Net profit is an essential indicator for investors, lenders, and business owners as it shows how effectively a company is utilizing its resources to generate profits.
A good net profit for eCommerce companies is 10%, according to Shopify statistics. However, this depends on the industry, as some have higher margins than others. This is why a net profit is a key metric to assess the profitability of the company. It provides insights into the company's ability to generate revenue and manage expenses effectively.
A high net profit indicates that the company is operating efficiently and has a healthy financial position. On the other hand, a low or negative net profit may indicate financial difficulties or inefficiencies in the company's operations.
The Importance of Gross Profit for Shopify Merchants
Gross profit plays a critical role in understanding the efficiency and profitability of an eCommerce business. It enables business owners and managers to assess the markup on their products and evaluate the impact of pricing strategies.
When it comes to eCommerce, calculating gross profit is essential. It allows businesses to determine how much money they are making after accounting for the cost of goods sold (COGS). By subtracting the COGS from the total revenue generated by sales, businesses can get a clear picture of their financial performance.
The Importance of Net Profit for Shopify Merchants
Net profit is crucial for several reasons:
- It reflects the overall financial health of a business. A positive net profit indicates that a company is operating profitably, while a negative or low net profit suggests financial difficulties. This information is valuable for investors, lenders, and potential buyers who want to assess the financial viability of a company before making any investment decisions.
- A consistently high net profit may attract more investors and increase the company's market value.
- A company with a low net profit may struggle to attract investors and may face challenges in raising capital for expansion or other business initiatives.
- Net profit impacts the valuation of a business. When valuing a company, potential buyers consider its net profit as a key factor.
- Net profit plays a role in determining the amount of taxes a business must pay.
- Taxes are calculated based on the company's net profit, and businesses with higher net profits generally have a higher tax liability. It is crucial for businesses to manage their net profit effectively to optimize their tax obligations and ensure compliance with tax regulations.
What is Profit Margin?
Profit margin can be defined as the ratio of net profit to revenue, expressed as a percentage. It represents the portion of each dollar in sales that contributes to the company’s profit. A higher profit margin indicates that the company is generating more profit relative to its revenue.
Profit margin is calculated by subtracting the cost of goods sold (COGS) and operating expenses from the total revenue, and then dividing the result by the total revenue. The operating profit margin formula is:
[(Total Revenue – Total Costs) / Total Revenue)] x 100
This formula allows businesses to evaluate their profitability and make informed decisions about pricing, cost management, and overall financial strategy.
Gross Profit Margin vs Net Profit Margin
It’s important to differentiate between gross profit margin and net profit margin. Gross profit margin represents the percentage of revenue that remains after deducting only the cost of goods sold (COGS). The gross profit margin for eCommerce was 42.8% in 2023, quite impressive compared to the overall average of business.
Net profit margin, on the other hand, considers all costs associated with running the business. It provides a more comprehensive view of the profitability of your eCommerce operations.
Strategies to Improve eCommerce Profit Margins
Increasing profit margins is an ongoing objective for any eCommerce business. Here are some strategies to consider:
- Efficient Inventory Management
- Optimizing Pricing Strategies
- Reducing Operational Costs
Tips to Improve Inventory Management
Efficient inventory management involves implementing inventory tracking systems, optimizing storage and warehouse layouts, and using technology to automate processes wherever possible. By streamlining these aspects, companies can reduce handling time and improve inventory flow, resulting in faster turnover.
Creating an effective eCommerce pricing strategy
An effective eCommerce pricing strategy involves more than just setting a price for your products. It requires a comprehensive understanding of your costs, your target market, and your competition. By carefully considering these factors, you can develop a pricing strategy that maximizes your profits while also meeting the needs and expectations of your customers.
Reducing operational costs
In addition to improving efficiency, reducing operational costs is equally important for overall profitability. To measure and monitor operational efficiency, companies need to consider key performance indicators (KPIs). These KPIs provide insights into the effectiveness of warehouse operations and help identify areas for improvement. By regularly tracking these indicators and analyzing the data, businesses can identify areas for improvement and implement targeted strategies.
Reduce your Shopify tech stack costs to increase profit
The average merchant spends $120 per month on apps but these costs can quickly and dramatically increase as the brand grows. So is it inevitable the more you make on Shopify, the more you’ll have to spend? The surprising answer is no! We have 3 cost saving tips to help you keep slash those costs and maximize revenue.
The first thing to do when consolidating your tech stack is to audit all the apps and tools you are currently paying for and remove those that are not necessary. Make a list of apps you have installed along with how much each app is costing you and decide which ones need to go. One way to consolidate is actually to pay slightly more for a more robust solution rather than paying for 3 or 4 basic solutions that only focus on one thing.
In the same vein of choosing solutions that give you more bang for your buck, another way to save on cost and time is to look for solutions that are part of a larger “platform approach”. AMP platform solutions Lifetimely by AMP and Upsell by AMP save you potentially hundreds of dollars a month, empowers you to work hand in hand to inform your growth strategy and provides a higher level of support and guidance.
A third way to keep costs, especially start up costs low is to try out apps that offer a free plan. There are many robust apps on the Shopify app store that offer “Free to install” plans that come with basic functionality which are enough for you to get a feel for the usefulness of the app in your stack and if the cost of paying would see an ROI.
Maximize Shopify profits with PPC marketing
By utilizing PPC advertising, Shopify brands can increase their visibility and attract high-quality traffic to their website. When users search for products or services related to the brand’s products, PPC ads can appear at the top of the search engine results page, making the business more likely to be noticed and clicked on.
PPC ads also provide data on user behavior. By analyzing the performance of their ads, online stores can gain insights into which keywords, ad copies, and landing pages are most effective in driving conversions. This data allows them to refine their marketing strategies and optimize their website for better conversion rates.
The first thing to do when consolidating your tech stack is to audit all the apps and tools you are currently paying for and remove those that are not necessary. Make a list of apps you have installed along with how much each app is costing you and decide which ones need to go. One way to consolidate is actually to pay slightly more for a more robust solution rather than paying for 3 or 4 basic solutions that only focus on one thing.
In the same vein of choosing solutions that give you more bang for your buck, another way to save on cost and time is to look for solutions that are part of a larger “platform approach”. AMP platform solutions Lifetimely by AMP and Upsell by AMP save you potentially hundreds of dollars a month, empowers you to work hand in hand to inform your growth strategy and provides a higher level of support and guidance.
A third way to keep costs, especially start up costs low is to try out apps that offer a free plan. There are many robust apps on the Shopify app store that offer “Free to install” plans that come with basic functionality which are enough for you to get a feel for the usefulness of the app in your stack and if the cost of paying would see an ROI.