What Is Profit Margin?
7 min read · Updated 2026-06
Definition
Profit margin is the percentage of revenue you keep after paying all costs. If you sell $100 worth of product and walk away with $20 after expenses, your profit margin is 20%.
It's not the same as revenue. Revenue is what comes in. Margin is what stays. A store doing $100K/month with a 5% margin keeps $5,000. A store doing $30K/month with a 25% margin keeps $7,500. The smaller store is more profitable.
Formula
Profit Margin = (Net Profit ÷ Revenue) × 100
Where Net Profit = Revenue − COGS − Refunds − Payment Fees − Shipping − Operating Costs. The tricky part is remembering to subtract everything, not just the obvious costs.
Example
Your Shopify store did $50,000 last month. Here's what actually happened:
- Revenue: $50,000
- COGS (products): −$18,000 (36%)
- Refunds: −$2,500 (5%)
- Payment processing: −$1,500 (3%)
- Shipping: −$3,000 (6%)
- App subscriptions: −$350
- Net Profit: $24,650 → 49.3% margin undefined
That's a strong margin. But if your refund rate jumps to 12% and you absorb free shipping without raising prices, the same store drops to under 30%. Small changes, big impact.
Common Mistakes
- Confusing gross margin with net margin. Gross margin only subtracts product cost. Net margin subtracts everything. The gap between them is where surprises live.
- Forgetting payment processing fees on refunds. When you refund $60, you give back $60 but the $2.04 payment fee does not come back. On a 5% refund rate, that's real money.
- Ignoring shipping subsidies. Charging $5 flat-rate when shipping costs $8.50 means you lose $3.50 per order. At 200 orders/month, that's $700 out of your margin.
- Not accounting for app costs. The average Shopify merchant spends $120/month on apps. That comes out of your margin too.
Industry Benchmarks
| Category | Gross Margin | Net Margin |
|---|---|---|
| Fashion & Apparel | 45–55% | 10–15% |
| Beauty & Cosmetics | 50–70% | 15–25% |
| Electronics | 20–35% | 5–10% |
| Home & Garden | 35–50% | 10–18% |
| Health Supplements | 55–75% | 20–30% |
These are averages. Your actual margins depend on pricing strategy, sourcing, and how well you control costs.
FAQ
What is a good profit margin for e-commerce?
Most healthy e-commerce stores operate at 20–30% net margin. Below 10% and you're vulnerable. Above 40% is excellent but uncommon outside digital products or luxury goods.
Is 50% profit margin good?
A 50% gross margin is solid for physical products. But a 50% net margin is exceptional. It usually means you have low overhead or operate in a premium niche.
What is the difference between margin and markup?
Margin is profit divided by selling price. Markup is profit divided by cost. A $50 product that costs $30 has a 40% margin but a 67% markup. Confusing them leads to underpricing.
Why do Shopify merchants struggle with margin?
Three reasons: they confuse revenue with profit, they do not track hidden costs (payment fees, refund losses, shipping subsidies), and they underprice based on competitor prices.
How often should I check my profit margin?
Monthly at minimum. If you are running ads or seeing refund rates above 5%, check weekly.
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