“While the gross margin of e-commerce companies is at 41.54%, the average net margin lingers at 7.26%.”
A critical insight from a study by NYU Stern School of Business
As an e-commerce owner, it is very common to dedicate a significant amount of time and resources for generating sales, ensuring customer happiness at every step of the way.
But, how often do you track your profits?
Especially, your net profit?
Net Profit is a crucial metric that measures the baseline pulse (or health) of your online business.
In fact, among the many statistics you can analyze, there is none more impactful than net profit!
You may spend hundreds of hours acquiring customers, retaining them, gaining positive product reviews, and generating an impressive amount of revenue. But all of that hard work will be in vain, if you’re unable to retain meaningful revenue after all expenses.
By tracking your net profit daily, you’ll be informed about the amount of money you’re making, how it’s being spent, and how much remains after expenses.
Daily analysis also ensures you make informed decisions to improve your business and operational strategies for the short and long term.
To assist you with this process, we’ve created this in-depth guide about what net profit means to an ecommerce owner, how to calculate it, and how to improve it using effective techniques.
Let’s start by looking at the meaning of net profit and some common differences among other profit-based terms.
What is Net Profit?
For an ecommerce store, Net Profit is the actual profit made after all expenses are subtracted.
It is sometimes referred to as Net income, Bottom line, Profit after Tax, or Net earnings.
It’s the metric that helps measure the overall success of your ecommerce business. It takes into account all expenses, and tells you how “healthy” your business is, financially speaking.
A typical online store spends considerable money on suppliers, sales, ads (Google, Facebook, Instagram, TikTok, Snapchat, etc), employees, warehouse leases, various taxes, utilities, and many other miscellaneous expenses.
After all these costs, you’ll need to determine the actual profit made, or in other words, the money remaining in your bank account after the “bills” are paid.
Revenue can also be a deceptive vanity metric. The central problem with merely looking at cash inflow is that you don’t know if you’re actually making any profit.
That’s where net profit comes into picture, helping unveil the most important numbers.
Often however, net profit is mistaken for gross profit.
So, how are they different from each other? – Let’s take a look.
Gross Profit Vs Net Profit – What is the difference?
Gross profit is the result of subtracting product procurement costs from sales revenue.
In other words, it’s the difference between a store’s total revenue and Cost Of Goods Sold (COGS). Cost of goods sold is the amount spent on producing or purchasing products that are sold to customers.
Conversely, net profit reveals the “bottom line” income of your ecommerce store after all operating expenses, overhead costs, taxes, and interest.
Although calculating gross margin is a helpful profit indicator, it doesn’t take operating expenses into account, so you won’t be looking at the whole picture.
In the aforementioned statistic above, gross profit margin for ecommerce stores averages around 41%, but the actual net profit margin is only 7.26%.
The further you research profit margins, the more insights you’ll gain about your store’s actual profit. Plus, you’ll be more operationally efficient and informed about company finances.
Nevertheless, gross profit is a critical metric.
For example, it’s used to determine both net and operating profit.
Net profit = Gross Profit – Expenses
You can also review gross profit for a convenient, “bird’s eye” view of your profitability, when you lack time to dive deeply into your profit margins.
To gain more knowledge about this topic, check out our extensive article on gross profit.
Operating profit (or operating profit margin) is similar to gross profit margin, but with one exception: gross profit only considers COGS (cost of goods sold), whereas operating profit considers expenses. Expenses may include rent, labor and wages, insurance, utilities, and advertising expenses, to name a few.
These expenses should be expected for any well-run ecommerce business.
Compared to gross profit, operating profit indicates how efficiently you control costs and expenses within your operations.
Some operational expenses are variable costs, like shipping fees and utilities. Although variable costs are more challenging while associating them with product procurement, they should still be considered.
Fixed costs, on the other hand, like an employee’s salary or office lease, are easier to account for. They remain constant month-month, and are less likely to change; fixed costs usually have limited impact on production or sales.
If you are a reseller who relies on multiple suppliers, operating expenses typically include transportation expenses related to wholesale product purchases.
Now understanding each key component, the standard formula to calculate operating profit is:
Operating Profit = Gross Profit – Operating Expenses
And to calculate operating profit margin:
Operating Profit Margin = (Operating Profit/Gross Revenue) x 100
As a reminder, profit margin is simply operating profit expressed as a percentage. After determining these figures, calculating net profit is just a step away.
Now let’s look at how to determine net profit in real time.
There are two formulas that are widely used to calculate net profit.
The basic, most commonly used formula for net profit is by subtracting total expenses from total revenue.
Net Profit = Total Revenue – Total Expenses
- Here, total revenue refers to revenue from sales, shipping revenue, membership fees, subscription fees, and other business income.
- Total expenses include COGS, transportation costs, leases, utilities, employee salaries, and any other overhead costs required to run your business.
If you’ve captured these numbers using spreadsheet(s) or via ecommerce platforms (Shopify, Magento, Bigcommerce, etc), then it’s easier to determine net profit.
However, ecommerce platforms may not give you a complete picture of your profit. Likewise, manually calculating these numbers daily is not a leisurely walk in the park.
So, we recommend using analytics tools like Bloom (for Shopify), and related applications intended to make business insight easier.
For those seeking to understand the inner mechanics of net profit, let’s look at an expanded version of the formula.
A more holistic formula to calculate your net profit is as follows:
Net Profit = Revenue (R) – COGS – Expenses (E) – Interest (I) – Taxes (T)
- Here, Revenue (R) indicates the total revenue made during a specific time period.
- COGS or cost of goods sold, reflects the costs of producing or procuring merchandise for resale.
- E represents operating expenses required to maintain your business.
- I represents any interest paid during a selected time period.
- T represents taxes paid on the profit. To get accurate net profit, deducting tax is an important step, which results in net profit after tax. However, you can also calculate net profit before taxes, by not factoring in taxes, if there is such a requirement.
This version of the net profit formula is comprehensive and inclusive of all factors. Meanwhile, the earlier calculation of net profit is intended to be a general guide and could be used for weekly reporting.
Once you’ve identified all revenue sources and expenses, it’s very easy to calculate net profit.
Let’s look at a quick example here.
Imagine you run a premium leather bag store online.
You sell each bag at a retail price of $750 and have sold 1,000 units last year. Including any other sources of income to your business, your total revenue for last year was $900,000.
The cost to procure a single leather bag, including shipping expenses, is $350. At 1,000 sold units, your COGS will be $350,000.
You then have operating expenses and overhead costs. We’ll assume that total expenses are $300,000.
Your interest payments are $50,000 and taxes amount to $100,000.
Now, let’s calculate your net profit:
Net Profit = $900,000 (R) – $350,000 (Cogs) – $300,000 (E) – 50,000 (I) – $100,000 (T) = $100,000
That’s a pretty decent net profit after all expenses are considered!
Let’s examine the net profit margin.
The formula to calculate net profit margin is:
Net Profit Margin = (Net Profit ⁄ Total Revenue) x 100
So, ($100,000/$900,000) x 100 = 11.12%
If your profit margin over the last year is better than previous years, then your business is trending upward.
If not, you’ll need to make pivotal choices to increase your net profit margin.
We’ve identified a few ways to help you increase your net profit.
3 ways to increase Net Profit
Improving net profit (or bottom line) revolves around multiple strategies and methods, but they can all be classified into three categories:
- Increase Revenue
- Lower COGS
- Reduce Expenses
Although more revenue doesn’t always mean increased profit, some techniques can optimize the bottom line. There are direct and indirect methods to increase your ecommerce revenue.
Following are a few suggested direct methods to increase revenue:
Optimize your pricing – Optimizing your prices will have a direct impact on your revenue and net profit. A small change in your retail price markups can significantly increase your overall revenue.
Although we may be stating the obvious, it’s wise to not over price your merchandise unless it’s perceived as a high-quality, high demand brand. One of the time-tested ways to improve pricing is by analyzing your ICP (Ideal Customer Profile). Understanding customers’ preferences gives you better insights about how they’d react to a certain change. You can then decrease or increase your markups strategically without distressing your ideal customers.
Pro tip: You may want to segment your customers and do an A/B test, targeting most profitable customers to analyze their choices. A/B test refers to a marketing strategy where you divide a segment of customers into two groups and show each group a different sales copy of the same product. Whichever version of the copy gets the best results is deemed to be the right marketing approach and therefore, will be used for the entire segment going forward.
Add new product lines – Expanding your product catalog can result in higher revenues. For example, if you’re selling fruit-based beverages online, you may add a new line of beverages, such as sugar-free or 100% fruit beverages, that customers would love to consume.
Some of these additions may not be huge. It can sometimes be as simple as adding a new flavor to an existing item and packaging it the right way.
Create a subscription model – Subscription-based ecommerce models have recently taken off with a high success rate. One of the best ecommerce examples for adapting this model is Dollar Shave Club. After understanding a customer’s shaving needs, they provide custom subscription packages for weekly and monthly razor blades.
By doing so, they retain customers for a longer period and their customer lifetime value also increases.
Improve your retention rate – Speaking of retention, the most profitable businesses have retained customers for longer periods. While there are many strategies that help in improving retention, there can be none greater than boosting customer trust.
When customers trust your brand, they come back to you for more. Some of the ways you can boost your customer trust is by providing reliable products, exceptional service, and phenomenal branding.
You can also retain them with rewards such as membership cards, coupons, discounts, and more.
Do check out our insightful article on retention rate to learn more.
Increase average order value of returning customers – Customers return to your business only when they’ve understood the value of your brand. So double down and capitalize on returning customers by offering them personalized product recommendations with better discounts.
Doing so will increase their average order value and your gross revenue.
Prioritize high margin products – Double down on high margin products whenever possible. Applying this strategy is much easier with profitable customers rather than new customers. Your profitable customers and returning customers, with a higher average order value, are more likely to buy your top end products.
So, improving your product recommendations based on your customers can be a winning factor.
Reduce cart abandonment with smart reminders – How many times have you visited Amazon, added all your favorite products to the cart, and then left without buying? Quite a few times, right? – Well, your customers are no different. They may have added multiple items to the cart but then never bought them for various reasons.
Sending periodic reminders to your customers about these items may nudge them a bit to complete that pending order. But never overdo it and end up in spam! You can employ an email automation platform to automatically trigger such remainders.
Create unique offerings – Offers such as bundle packages and personalized kits can boost sales tremendously. For example, if you’re an online music store selling guitars, you can offer a pack of guitar, amplifier, strings, bag, and stand for an exclusive price.
That solves the problem for many newbie guitar players, resulting in increased trust in the brand and obviously, average order value.
Offer reasonable & measurable discounts/coupons – Be it online or brick & mortar, without discounts, no retail business will succeed. However, your discounts and coupons need to be reasonable and should help you make a profit.
For example, if your product manufacturing price is $50 and your retail price is at $100, then you may add a discount of up to 20% which will help you retain some profit. Offering large discounts or uninformed discounts may result in a poor net profit. In other words, though there’s no definitive guide and each business is different, you need to offer smart discounts based on your customer behavior.
Adopt data driven strategies – Whatever strategy you want to implement for increasing, ensure you back it up with solid data and analytics. You cannot make critical decisions based on just gut feeling and without referring to live data.
Even if you’ve just started your ecommerce store, you can get live data of your store’s performance in a few weeks. So, utilize data driven strategies to improve your sales.
Pro tip: Using data analytics tools built for ecommerce merchants, such as Bloom Analytics, can get you insights which you’ve never thought existed.
Here are some indirect methods to increase revenue
Increase the number of visitors to the store – How can you get more revenue if the number of visitors to your store is less? – Implement organic and paid marketing methods to increase your top of the funnel (visitors), which will likely result in more conversions.
One of the popular organic methods of increasing traffic is content marketing. You can establish a blog and social channels, and generate creative content around your products & business to boost your web traffic. Likewise, for faster results, you can choose to work with influencers, affiliates, and even run ads.
Segment your customers based on their behavior – As mentioned earlier, customer segmentation is by far the most important activity for an ecommerce store. When you segment customers based on their purchase behavior, you’re more likely to target the right customers.
That will enable a higher ROI (return on investment) from your sales and marketing strategies.
Focus on your conversion rate – After testing multiple sales and marketing platforms for a while, you’d know which one works the best for your business. And what we mean by that is the platform that brings in the most or better results.
Once you’ve circled out such platforms, double down on your efforts across these platforms. That will result in higher conversions from your top of the funnel traffic.
Use email marketing tools for cross and upselling – In the digital landscape, email marketing is one of the biggest tools to improve your business. Create enticing email marketing campaigns to make your customers return to your product and to upsell or cross sell your products.
Optimize your website’s user experience – The average person today stays on a webpage for less than 3 seconds. That means your online store should look fantastic and easy to use. You should also optimize your user experience by making the customer’s journey very simple from the beginning to the end.
Remove any unnecessary screens and steps that complicate a user’s journey. One such important place is the checkout. How easily can you help a customer checkout within a few seconds? – Improving such critical aspects of your site can result in higher conversions.
Pro tip: Hire Shopify developers from sites such as Upwork to improve the design and technical aspects of your site.
Invest in quality customer support – Customer support is at the heart of an ecommerce business. Good customer experience results in long lasting customers that return to you multiple times.
On the other hand, even a single bad customer experience will result in losing not just that customer but many more potential customers due to negative word to mouth. So, ensure your customer support team gives their best 24/7.
Reviews from customers – The last yet the best way to improve your revenue is to gain as many positive reviews as you can from your customers. Gaining text and video reviews will increase purchase intent and make visitors feel that they should have your product.
You may even consider some of your best customers to be your brand ambassadors, who will influence your brand in a positive way.
Cogs apply to resellers as well as manufacturers. And lowering your cost of goods sold is critical to overall profits.
Here are some ways that re-sellers can reduce their Cogs.
Negotiate better prices with your supplier – Just like you, suppliers also want to make a profit. So, negotiations with suppliers can sometimes be tense, challenging, and time sensitive. Nevertheless, it is important that you strike a good bargain with your suppliers. Higher cost of goods sold can be a detrimental factor to your online store.
Diversify your product sources – One of the best ways to reduce cogs and improve your inventory is by sourcing your products from multiple suppliers. Consider hotspots such as China, India, and Philippines, to get the best suppliers. Doing so will also reduce any supply chain inefficiencies.
Optimize your shipping cost – When you order bulk shipments, it is bound to reduce your overall cost of products as you’ll be charged based on volume. Shipping a smaller number of products from far away locations is not the best business decision.
If you’re a store owner who’s also a manufacturer, then here are some ways to reduce cogs.
Learn about the cost for each raw material you procure – Raw materials can sometimes be quite expensive, depending on the type of products you manufacture. It’s important to know the price of each raw material that’s used to create your product. Knowing per material cost will help you negotiate better prices with your provider or supplier.
Know the unit cost of final products – As you begin to produce your products in various batches, it is critical to know the unit cost of each product from a batch.
For example, if you’re a leather bag store and manufacture it yourself, you’d use a certain amount of raw material to produce a batch of products. Let’s say you use 10 raw hides, 4 days of labor, and $500 worth of accessories to make 25 bags. You can calculate the total cost of production and then divide it by the total number of units to get a per unit cost. When you’re armed with such information, you can make better choices in production as well as better deals with your suppliers.
Now, here are some ways to reduce Cogs for both resellers and manufacturers
Inventory management – Effective management of inventory will reduce costs drastically. You need to keep constant tabs on the average price for each batch of goods, the number of days your goods have been sitting ideally in your warehouse, and how carefully it’s being handled on a day-to-day basis. You can use ERP and WMS solutions to get a better visibility of your inventory.
Pro tip: You’d also need to optimize your handling and packaging costs for each unit. You may want to hire an outside resource to help you with this process.
The final way to increase your net profit is by reducing your expenses.
Here are some ways to reduce them.
Reduce your total refunds – On an average 10% of all sales are refunds. To ensure you don’t lose on refunds and wasted products, identify real customers from high-risk customers. That will ensure you don’t accept orders from risky customers. If you’re a Shopify merchant, then you can use the “Check Risk Score” in your Shopify platform.
Adapt lean processes – Try your best to streamline your processes in order to eliminate – defects, overproduction, waiting, not utilized talent, transportation, inventory excess, motion waste, and excess processing. Doing so will reduce your costs drastically.
Ad costs – A lot of ecommerce merchants rely on ads. It could be cost per clicks (CPC) or cost per impressions (CPM) from different platforms. Keeping a tab on your Return on Ad Spend (ROAS) will ensure that you’re getting ample orders and customers from your ad spend.
Pro tip: Hire the best copywriters and designers to ensure your ad campaigns give best conversions.
Optimize your employee cost – It is always good to have in-house employees to keep your operations smooth and steady. However, you may sometimes have to outsource some function to reduce delays in process. In either scenario, you’ve to ensure that you’re not overpaying.
Optimize your other expenses – Ensure you reduce your other expenses such as bank charges, influencer payments, office rent & utilities, IT Software expenses (like Shopify, Zapier, App costs), professional services, travel expenses, and any other SG&A (selling, general, and administrative) expenses that can hinder your net profit.
Automate as much as possible – The last but definitely the least. With increased technology, there are multiple ways that you can automate your operations and reduce manual costs. Be it tracking product replenishment, automating the returns processes, or even taking aid of a robust chat assistant, these are necessary ways to reduce your costs.
Pro tip: Have an interactive knowledge base for each of your products. It reduces customer support costs drastically.
Even if you have the best resources at hand, you need a robust analytics platform that has your back on any given day.
With Bloom, you can be rest assured that your profits are accurate to dot, as the platform gathers data by integrating with all your sources. This includes your Shopify store, Google Analytics, Facebook (Meta), and any other data resource that you have.
Bloom also understands customer behavior and provides real-time insights into purchase behavior by analyzing all of your customers in cohorts.
To be honest, even Shopify advanced customers are desperate to get their hands on such advanced analytics for better business decisions,
and here we are bringing it to you for an insanely affordable price.
So start using Bloom Analytics, to get the best profit analytics for your store.
You can start with the free trial today!
Frequently Asked Questions (FAQs)
Where can I find Net Profit in my Shopify store?
Typically, there are two places you will find the Net profit.
- If you are a Shopify store owner, you will find it in Shopify reports in your online stores reporting system. However, if you need thorough insights of your net profits you can install 3rd party analytics applications such as Bloom Analytics which provides you better insights.
- It also appears at the bottom line in your year end financial statement. Hence Net profit is also referred as Bottom Line.
Though Shopify shows multiple reports, it is not the best form of business intelligence to run your ecommerce company. That’s why you need a business intelligence platform like bloom analytics that is just built for Shopify store owners.
