Gross profit margin for online shops: how to work it out, and what every discount costs it

What counts as cost of goods in an online shop

Let's face it: the formula's the easy bit. The argument is over what goes into the cost of goods, and two shops selling the same product can report different margins because they drew the line in different places.

• The product itself, from your supplier or your own production
• Freight and import duty to get it into your warehouse
• Packaging that ships with every order, if you count it here
• Often kept below the line: postage to the customer, payment fees, the ads and the agency

Where the line sits is your accountant's call, not ours, and none of this is financial advice. Just keep the line in the same place every month. Move it and the trend means nothing.

Why every discount comes straight out of gross profit

Here's the hard truth: your supplier didn't give you a discount. When you take money off the price, the cost of the goods stays exactly where it was. So the whole discount comes out of your profit.

That's how a sale can lift revenue and shrink profit in the same week. The order count goes up, the profit per order comes down, and the email that sent the code reports the revenue as a win. Email reports count revenue, not margin.

Using product margins to decide what your emails sell

Margin by product is the spreadsheet your email team should have and usually doesn't. Shopify will build it for you, as long as every product has a cost per item filled in. Once it exists, a few decisions make themselves.

We've written up whether your welcome flow needs a discount and the alternatives to discounting in a quiet month. Both come back to this number, and so does the cross sell flow.