What is gross margin in ecommerce?
How is gross margin calculated?
Take revenue. Subtract COGS, the direct cost of producing or buying the goods you sold in the period. Divide the result by revenue.
COGS leaves out marketing, sales and administrative costs. So gross margin does not tell you what the business keeps. It tells you what the product earns on paper before almost everything else.
Why does it matter?
It is an easy margin to reach for, and an easy one to use wrongly. If your COGS leaves out costs that grow with every order, a break-even built on gross margin flatters you.
Example (illustrative): A €100 order has a gross margin of €40, with COGS covering the product only. Delivery costs €6 and card processing €2. Refunds cost €4 per order on average. That leaves €28 before ads. A break-even point built on €40 is too optimistic.
For ZFD: Our convention is to use contribution margin for break-even: revenue minus variable costs that grow with every order, before marketing. Gross margin is the starting line, not the finish. See ROAS looks good but no profit for where the money goes in between.
Worked example
Easily confused with
Gross margin vs Contribution margin
Revenue minus variable costs: goods, shipping, payment fees, returns and discounts. Sources differ on which costs they include. It is lower than gross margin.
Gross margin vs Profit margin
Not a precise term. Ask what costs are in.
Gross margin vs AOV
Average revenue per order. It is an amount, gross margin is a share.
Gross margin vs Break-even ROAS
The lowest ROAS at which ads do not lose money: 1 divided by margin. Sources differ on which margin. Polar uses gross margin. Eightx uses contribution margin.
FAQ
Is gross margin the same as profit?
No. Gross margin leaves out marketing and overheads, and often some per-order costs too, so profit is lower.
Which margin should I use for ad targets?
Our convention is contribution margin, before marketing. Gross margin usually gives a break-even that is too easy to hit.
What is a good gross margin?
We do not quote one. It varies by product and business. Compare yourself with your own history and your own costs.
Sources
Let’s find what’s actually working.
Next step. Put your margin into the numbers. Use the Is your ROAS real? calculator.