Types of Margin in E-commerce
Margin is not a single number — it depends on which costs you deduct from revenue. Using the wrong margin type for the wrong decision leads to pricing errors, unprofitable campaigns, and misleading P&L reporting.
The three margins every e-commerce operator needs to understand are:
Gross Margin
Gross margin measures how much of a product's selling price remains after paying for the product itself (COGS). It's the primary metric for assessing individual product profitability and setting prices.
GROSS MARGIN FORMULA
Gross Profit = Selling Price − COGS
Gross Margin % = (Selling Price − COGS) ÷ Selling Price × 100
—
Example: Product sells for £75.00 | COGS (landed cost): £27.50
Gross Profit = £47.50 | Gross Margin = £47.50 ÷ £75.00 × 100 = 63.3%
Gross margin is the right metric for: comparing product profitability, setting initial prices, and calculating minimum ROAS targets for advertising. It does not tell you whether the business is profitable overall — that requires net margin.
Gross Margin Benchmarks by Category
Consumer electronics: 20–35% | Apparel & footwear: 45–65% | Health & beauty: 50–70% | Home & garden: 35–55% | Sports & outdoor: 35–50% | Books & media: 25–45%. Your gross margin needs to comfortably cover advertising, shipping, and overheads to leave a net profit.
Contribution Margin
Contribution margin deducts all variable costs from revenue — costs that change with each sale. This gives a more realistic picture of per-sale profitability than gross margin, particularly for Google Shopping decisions.
CONTRIBUTION MARGIN FORMULA
Contribution Margin = Revenue − COGS − Variable Fulfilment − Payment Processing − Returns Allowance − Ad Spend
—
Selling price: £75.00
COGS: −£27.50
Outbound shipping: −£3.95
Payment processing (1.5%): −£1.13
Returns allowance (8% rate, £4 handling): −£0.32 (0.08 × £4)
Ad cost (at target ROAS 4.0): −£18.75 (£75 ÷ 4)
Contribution Margin = £23.35 (31.1%)
This is the true per-sale contribution to your fixed costs and profit. If contribution margin is negative, you're losing money on every sale even before factoring in rent, staff, or software costs.
Ad Spend Changes with ROAS
When calculating contribution margin including ad spend, your result changes with your actual ROAS. Use your target ROAS to calculate whether the campaign is designed to be profitable. Check actual ROAS against target regularly to validate the model.
Net Margin
Net margin is your bottom-line profitability after all costs — fixed overheads (rent, staff, software), interest, and tax. For an individual product, net margin is difficult to calculate precisely because fixed costs must be allocated across all products sold.
NET MARGIN FORMULA (Business Level)
Net Profit = Revenue − COGS − All Operating Expenses − Interest − Tax
Net Margin % = Net Profit ÷ Revenue × 100
—
E-commerce brands typically target 5–15% net margin. Below 5% and the business has very little resilience. Above 15% and you're either in a very high-margin category or under-investing in growth.
Margin vs. Markup — A Critical Distinction
Margin and markup are often confused, but they measure fundamentally different things. Using the wrong one when setting prices can leave you significantly underpriced or overpriced.
| Concept | Formula | Example (Cost £20, Price £50) |
|---|---|---|
| Margin | (Price − Cost) ÷ Price | (£50 − £20) ÷ £50 = 60% |
| Markup | (Price − Cost) ÷ Cost | (£50 − £20) ÷ £20 = 150% |
To convert: Margin = Markup ÷ (1 + Markup) | Markup = Margin ÷ (1 − Margin)
Example: A 50% markup = 50% ÷ 150% = 33.3% margin. If your finance team reports "50% markup" and you interpret it as "50% margin", you'll set your ROAS target incorrectly and run unprofitable campaigns.
Per-SKU Margin Calculation
Aggregate margin figures hide the profitable-versus-unprofitable split in your catalogue. You need per-SKU margin data to make good advertising decisions.
WORKED EXAMPLE — Three Products, Same Average Revenue
Product A: Sell price £35 | COGS £8 | Gross Margin 77%
Product B: Sell price £35 | COGS £19 | Gross Margin 46%
Product C: Sell price £35 | COGS £28 | Gross Margin 20%
—
Average gross margin across all three: 48% — looks fine.
But Product C cannot profitably support Google Shopping ads if your typical ad cost is 15–18% of revenue, because that leaves only 2–5% to cover shipping, payment fees, and overheads.
Decision: Increase Product C's price, reduce its ad budget, or cut it from the range.
Margin Tiers for Google Ads Targeting
Once you have per-SKU gross margins, group products into tiers and assign a different ROAS target to each tier. This is the core mechanic of profitable Google Shopping management.
| Margin Tier | Gross Margin | Suggested Min. ROAS | Strategy |
|---|---|---|---|
| High | >55% | 2.5–3.5× | Aggressive bidding — more spend is profitable |
| Medium | 35–55% | 3.5–5.0× | Balanced — bid to achieve target ROAS |
| Low | 20–35% | 5.0–8.0× | Defensive — only bid if category is strategic |
| Marginal | <20% | Pause or exclude | Advertising will likely erode all profit |
GROW Platform Automates This
GROW Platform calculates the minimum viable ROAS for each product based on its specific margin and cost stack. Rather than applying a blanket ROAS target across your account, each product gets the right target — maximising profitable volume from high-margin SKUs and protecting you from spending on low-margin ones.
Frequently Asked Questions
What is gross margin for a product?
Gross margin is the percentage of a product's selling price that remains after deducting the Cost of Goods Sold (COGS). Formula: Gross Margin % = (Selling Price − COGS) ÷ Selling Price × 100. A product selling for £50 with a COGS of £20 has a 60% gross margin.
What is contribution margin?
Contribution margin is the amount remaining after deducting all variable costs from revenue — including COGS, variable fulfilment, payment processing, and advertising costs. It shows how much each sale contributes to covering fixed costs and generating profit.
What is the difference between margin and markup?
Margin is calculated as a percentage of the selling price: (Price − Cost) ÷ Price. Markup is calculated as a percentage of cost: (Price − Cost) ÷ Cost. A product with a 50% markup has a 33% margin. Always specify which you mean.
What gross margin do I need to run profitable Google Shopping campaigns?
A rough rule of thumb: your gross margin % must be significantly higher than your advertising cost as a % of revenue. If you spend 15% of revenue on Google Ads and have a 20% gross margin, you have almost nothing left for operating costs. Most profitable Google Shopping campaigns require at least 35–40% gross margin.
How do I use margin tiers to manage my product catalogue?
Group products into margin tiers (e.g., high >50%, medium 30–50%, low <30%). Set different ROAS targets for each tier: lower ROAS for high-margin products, higher ROAS for low-margin products. This ensures you bid aggressively on products where you can afford to and defensively on those where you can't.
Next Steps
Start by calculating gross margin for your top 20 products by revenue. Rank them by margin and identify any products currently receiving significant Google Ads budget that have a margin below 30%. These are candidates for a ROAS increase, a price increase, or removal from your Shopping campaigns.
Per-SKU Margin Targets, Automated
GROW Platform stores your COGS and cost stack per product and automatically calculates the minimum profitable ROAS for every SKU in your Google Shopping campaigns. High-margin products get aggressive bids; low-margin products are protected. Create an account →
