Every online retailer has a different goal, niche, typically different products, and so on. However, one item that is consistent with everyone is that they are trying their best to make a profit. Profit margins can and will differ between different industries and businesses as each one tries to make itself stand out and be unique. That being said there are general numbers that each business will want to hit to remain in business and flourish.
A good profit margin for any general online retailer is around 45% . While this number may seem high to some, you also need to take into consideration that online businesses will typically have less overhead monthly expenses due to their lack of a storefront.
What Is A Profit Margin?
Before trying to grasp what a good one is, we should first cover what a profit margin is. Profit margin is typically displayed as a percentage because it represents what percent of each dollar made by the business is profit. This figure is determined by seeing how much the business has sold, subtracting fixed and variable expenses, and seeing how much money is left over.
Fixed expenses are pretty much what the name entails. They are consistent expenses; they do not vary from month to month. For an online business, these could be website fees (registration and upkeep), bank fees, and employee salaries.
Variable expenses then are those that tend to be inconsistent and irregular. Such as shipping fees, packaging materials, and raw materials. These are items you may not be buying or paying for as often or their prices can change.
Now, as mentioned earlier, these two types of costs or expenses are used to figure out the cost of goods sold and find the profit margin. However, the overall calculations needed are a bit more intense than just adding up a few numbers and subtracting them from the total depending on the type of profit margin you want.
Types Of Profit Margins
Another aspect to consider is the type of profit margin you want to look at and analyze. While they are all quite similar in the grand scheme of things, they each show different aspects of the business. There are the operating profit margin, gross profit margin, and net profit margin.
Net profit margin (NPM) is the most talked-about one, as it is often called the bottom line. It follows the formula discussed above where you subtract your expenses (fixed and variable) from your revenue to see how much is left over. This number essentially shows how capable your retail store is at turning income into profit.
You calculate the net profit margin by taking your total revenue and subtracting your cost of goods sold (COGS), interest, taxes, and expenses from it. Once you have that number you divide it by the revenue then multiply that result by a hundred. This calculation will give you the percentage that represents your net profit.
Your formula may look like this:
NPM = [(Revenue – COGS – Operating Expenses – Other Expenses – Interest – Taxes) / Revenue] x 100
Then there is the gross profit margin, which tends to be less complicated than the net profit margin. For this one, you just subtract the cost of your goods sold from your total revenue, divide that number by the total revenue, and then multiply it by a hundred.
This formula will look like this:
Gross Margin = [(Total Revenue – COGS) / Total Revenue) x 100
This formula is primarily used for individual items to test their performance and see how well they are selling. It can provide a broad overview of how a business may be doing, especially an online retailer as they have fewer overhead expenses, but it does not give a concise figure.
Lastly, we have the operating profit margin (OPM) that is typically used to look at and understand how the day-to-day activities look for a business. As an online retailer, this will include items such as daily sales, warehouse or storage fees, etc. Any of the day-to-day fees associated with operating your online business will be counted.
This allows you to see the portion of your profit that comes from operating the actual business, separate from any other income you may have. Nowadays businesses can also bring in extra income from collaborations, promotions, or even social media.
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The formula looks like this:
OPM = (Operating Income / Revenue) x 100
Those are the three types of profit margins used when looking at the financial status of an online retailer. Each has its own rule and is important in its own way. That being said you are most likely to care more about the net profit margin and that percentage more often than the other two numbers.
Ways To Increase Your Profit Margin
After knowing about the different types of margins, you may be wondering how you can increase them? This is something that every business owner considers since the more profit you make, the more you can do with your business.
The first way is to reduce the amount you are spending in general. This means reducing production costs where you can. Whether that means buying more wholesale inventory to get a better deal on pricing, trying out a different supplier that offers a lower price, or other options. As long as the decisions you are making help to reduce the cost you are spending on each item then it should help to make you more profitable.
Another option is to increase your prices. A general rule of thumb for retailers is that they figure out the profit margin they would like to have and then base prices off of what that price would be for each item compared to the price that customers would pay for it. However, if you are interested in seeing a 45% profit margin, then your items should be priced with that margin in mind. There’s no way you can reach that unless you are pricing your items accordingly.
This is why it’s important to consider these items when opening your online store because you can always lower prices or put items on sale, but some customers typically aren’t happy to see prices raised. So it can be an interesting situation to navigate unless you slowly raise prices by a dollar or two for products over time.
The last option to mention is to simply sell more inventory. This may mean being more active on social media, and maybe spending a little bit on ads or promotional materials to ensure that eyes are on your store. The more you sell, the more you can order at once (allowing for more wholesale opportunities, when possible, again helping to reduce costs) and ensuring that you can move items quickly.
A good profit margin for online retailers to see and have is about 45%. This number is higher than brick-and-mortar stores as there are fewer overhead fees associated with the business. Keeping that in mind you should always know how to find each type of profit margin and that there are ways to improve them if you are unhappy with the percentage. The more you make the more wiggle room you have with your business.
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Related Questions
- How do you calculate the cost of goods sold?
The cost of goods sold is a combination of what its name suggests. You add up all of the costs associated with the items you are selling and the total number is your cost of goods sold. This number takes into consideration the price of raw materials, shipping fees, labor needed to create the product, utilities for warehouses or production sites, and the cost of equipment needed for production. Essentially the total of every step needed to create the final product being sold.
- Do I need to worry about calculating my profit margin?
Yes, every business owner needs to worry about their profit margins and should know how to calculate them. While the overall numbers do not need to be figured out every week, it is a good thing to revisit multiple times throughout the year. If you notice a product isn’t selling well it can be good to find its gross profit margin to see if it should be discontinued or not. If you try to pitch yourself to an investor, they will want to know your most recent numbers, so whether you or your accountant are calculating them they do matter.
- What happens if my profit margin is below the ideal point mentioned?
The profit margin mentioned, of 45%, is a calculated percentage that many online retailers have found to be a percentage to have and work with. Depending upon the size of your business, the products you sell, and other factors a lower profit margin can be acceptable. It all comes down to your business, how your financials look, and what your plans are moving forward.
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Please note: This blog post is for educational purposes only and does not constitute legal advice. Please consult a legal expert to address your specific needs.
Meet Shawn Chun: Entrepreneur and Fashion Business Fan.
I’m a happy individual who happens to be an entrepreneur. I have owned several types of businesses in my life from a coffee shop to an import and export business to an online review business plus a few more and now I create online resources for those interested in starting new ventures. It’s demanding work but I love it. I do it for those passionate about their business and their goals. That’s why when I meet a designer or boutique owner at a craft fair, farmers market, retail location or anywhere else I see myself. I know how hard the struggle is to retain clients, find good employees and keep the business growing all while trying to stay competitive.
That’s why I created Fashion Business Boss: I want to help fashion business owners like you build a thriving business that brings you endless joy and supports your ideal lifestyle.