Ecommerce Gross Margin: What's a Good Range and How to Improve It

A lot of sellers get cost of goods sold wrong. Let's talk about what it is. Cost of goods sold is the cost of producing your product and getting it to your warehouse. I often see sellers wanting to include their fulfillment costs to the customer, merchant fees, even advertising as part of their cost of goods sold. This is wrong. Don't do this. These are the costs of sale, not the cost of goods sold. For more details, watch my video, "COGS Explained for Ecommerce Sellers."

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Now, another thing I want to talk about is the concept of contribution margin. The contribution margin is the difference between the cost of the sale and the sale, divided by sales. Okay, let's get that right. Basically, it's a ratio that shows you what's left over after you've sold your product. In essence, the contribution margin is your profit after all the variable costs of sale. What's left over goes towards fixed costs and, ultimately, profit. For more on this topic, watch my video on Ecommerce Contribution Margin Explained.

Alright, the final definition, net profit margin. Net profit margin is the percentage of sales revenue that is left over after all of your costs, so your cost of goods sold, your cost of sale, and your fixed operating expenses. It is the key indicator of your overall profitability.

Now, here's something to consider. Your net profit margin is never going to be greater than your contribution margin, which will never be greater than your gross margin. Think about that.

1:50 What a good gross margin looks like

Time for the money question. What is a good gross margin in ecommerce? Generally, a good gross margin ranges between 40% to 80%, but let's talk about this. This range is impacted by your manufacturing, by your product type, and by your business model.

40% is the bare minimum that you want to achieve. Let's talk about why. You will likely need 10 to 15% of your sales for fulfillment. You're usually gonna need about 3% for merchant fees. Advertising can range widely, and then you have operating expenses. A brand that has 40% gross margin usually doesn't have a lot of money to spend on advertising. And if you are advertising, great advertising efficiency is around 20% of sales.

2:37 Resellers versus brands

In my experience, lower gross margin ecommerce businesses are those that are buying product and reselling it. There's no unique brand. You're competing against many other sellers on the same product. Because you're selling the same product as others are, there's a pressure that drives down prices, which squeezes gross margins. That said, customers are more likely to find your product through search, and so SEO can be a good avenue to get customer acquisition and therefore reducing the need for advertising spend.

Now, if you have your own brand, I have seen gross margins as high as 80%. A lot of this is product-specific, but having your own brand and unique product gives you pricing power, and pricing power gives you good gross margins. And this is very good because you're going to need all that extra money to spend on advertising to acquire customers.

3:23 How to improve your gross margin

Now, if you don't like your gross margins, you want to improve them. Let's talk about ways you can.

The first is optimizing pricing. Note, I didn't say raise pricing, although this can be a component of price optimization. When you optimize prices, you're trying to find the highest price that will generate the most volume. By finding that optimized price, you'll maximize profits.

Another way to increase your gross margins is to reduce your cost of goods sold. This can come by negotiating better deals with your suppliers, streamlining your manufacturing process, and/or reducing waste.

Another thing is you can look at your product and your product quality, improving your product quality in a way that will allow you to increase your price.

And finally, for those that have brands, brands create value. The way that you communicate, the way that you ship, the way that you interact with your customers will create more value than just the cost of the product. If you think about it, what's the difference between Nike and a lot of lower cost shoes? It's brand.

If you need help with your accounting or finance with your business, reach out to LedgerGurus in the link in the description. If you found this video helpful, like it, ask me a question in the comments, and subscribe to our channel where you'll get more content like this.