Shopify Profit Margins: What's Good, How to Calculate & Improve Yours

Profit margin is the single most important metric for your Shopify store's health. Revenue is vanity, profit is sanity. You can do $100k/month in sales and still go bankrupt if margins are too thin.

This guide explains profit margins in plain English, shows you how to calculate yours accurately, benchmarks by industry, and gives you actionable strategies to improve margins immediately.

Understanding Profit Margins: The Basics

What is Profit Margin?

Profit margin is the percentage of revenue you keep as profit after all costs. It tells you how much money you actually make per dollar of sales.

The formula:

Profit Margin = (Net Profit ÷ Revenue) × 100

Example:

• Revenue: $10,000
• Total costs: $7,500
• Net profit: $2,500
• Profit margin: ($2,500 ÷ $10,000) × 100 = 25%

This means for every dollar in sales, you keep 25 cents as profit.

Gross Margin vs Net Margin (Important Difference)

Gross Profit Margin:

Revenue minus cost of goods sold (COGS) only. Doesn't include operating expenses.

Gross Margin = (Revenue - COGS) ÷ Revenue × 100

Example:

• Revenue: $10,000
• COGS (product + shipping): $4,000
• Gross profit: $6,000
• Gross margin: 60%

Net Profit Margin:

Revenue minus ALL costs (COGS + marketing + apps + fees + everything).

Net Margin = (Revenue - All Costs) ÷ Revenue × 100

Example:

• Revenue: $10,000
• COGS: $4,000
• Marketing: $3,500
• Shopify + apps: $100
• Payment processing: $300
• Other: $600
• Total costs: $8,500
• Net profit: $1,500
• Net margin: 15%

What matters: Net margin. Gross margin looks good but doesn't pay bills. Net margin shows true profitability.

How to Calculate Your Shopify Profit Margin

Step 1: Calculate Revenue

Total sales for the period (month, quarter, year). Include all sales channels.

Where to find it: Shopify Analytics → Reports → Sales over time

Step 2: Calculate Cost of Goods Sold (COGS)

COGS includes everything directly required to deliver the product:

• Product cost: What you pay supplier/manufacturer
• Shipping to you: Freight, import fees (if applicable)
• Shipping to customer: Fulfillment costs
• Packaging: Boxes, mailers, tape, inserts
• Transaction fees: Payment processing (Shopify Payments, PayPal, Stripe)

Example COGS breakdown:

• Product: $15
• Shipping to customer: $6
• Packaging: $1
• Payment processing (2.9% + 30¢ on $45 sale): $1.61
• Total COGS: $23.61

Step 3: Calculate Operating Expenses

Everything else it costs to run the business:

• Marketing & advertising: Facebook ads, Google ads, influencers
• Shopify subscription: $29-299/month
• Apps: Email, reviews, bundles, shipping software ($20-100/month typical)
• Design & content: Photos, videos, copywriting
• Customer service: Support software, VA costs
• Returns & refunds: Product cost + shipping both ways
• Software & tools: Analytics, accounting, etc.

Step 4: Calculate Net Profit

Net Profit = Revenue - COGS - Operating Expenses

Complete example:

• Revenue: $50,000
• COGS: $20,000
• Marketing: $18,000
• Shopify + apps: $150
• Other expenses: $2,000
• Total costs: $40,150
• Net profit: $9,850
• Net profit margin: 19.7%

Profit Margin Benchmarks by Business Model

Dropshipping: 10-20% Net Margin

Typical breakdown:

• Gross margin: 50-60% (sell $40, cost $15-20)
• Marketing: 30-40% of revenue (high customer acquisition cost)
• Net margin: 10-20%

Why margins are lower:

• No product differentiation = higher ad costs
• Long shipping times = need to discount
• Competition drives prices down

Good dropshipping margin: 15%+

Print on Demand: 15-25% Net Margin

Typical breakdown:

• Gross margin: 40-50% (sell $30, cost $15-18)
• Marketing: 25-35% of revenue
• Net margin: 15-25%

Better than dropshipping because:

• Unique designs = less competition
• Faster US/local fulfillment
• Brand differentiation possible

Good POD margin: 20%+

Private Label/Wholesale: 30-50% Net Margin

Typical breakdown:

• Gross margin: 60-75% (buy bulk, better pricing)
• Marketing: 20-30% (brand loyalty reduces CAC over time)
• Net margin: 30-50%

Higher margins because:

• Bulk purchasing = lower COGS
• Brand equity = less ad dependency
• Repeat customers = lower acquisition costs
• Premium pricing possible

Good private label margin: 35%+

Handmade/Artisan: 40-60% Net Margin

Typical breakdown:

• Gross margin: 70-80% (low material costs, high perceived value)
• Marketing: 15-25% (word of mouth, organic social)
• Net margin: 40-60%

Best margins because:

• Unique products command premium prices
• Lower marketing costs (organic reach)
• No middleman
• Labor is often not fully accounted for

Good handmade margin: 45%+

What Hurts Your Profit Margins

1. High Customer Acquisition Cost (CAC)

Spending $50 to acquire a customer who buys $60 worth of products leaves $10 for COGS, fees, and profit. Unsustainable.

Solution:

• Increase average order value (bundles, volume discounts)
• Improve ad targeting and creative
• Focus on repeat customers (email, retargeting)
• Optimize conversion rate (better landing pages)

2. Low Average Order Value (AOV)

Fixed costs (marketing, fulfillment setup) hurt more on small orders.

Example:

• $15 AOV: Need 10% margin = $1.50 profit per order
• $60 AOV: 10% margin = $6 profit per order

Solution:

• Free shipping thresholds
• Volume discounts (Uppa Bundles)
• Product bundles
• Upsells and cross-sells

3. Returns and Chargebacks

5-10% return rate typical. Each return costs product + shipping both ways + processing time.

Solution:

• Better product descriptions (reduce expectation mismatch)
• Size guides and measurements
• Quality photos from all angles
• Restocking fees (if market allows)

4. App Stack Bloat

$10/month apps add up. 10 apps = $100/month = $1,200/year overhead.

Solution:

• Audit apps quarterly - cancel unused ones
• Look for all-in-one solutions
• Negotiate annual pricing (usually 20% off)

5. Inefficient Shipping

Using retail shipping rates instead of Shopify discounts costs 50-88% more.

Solution:

• Always buy labels through Shopify
• Right-size packaging (avoid dimensional weight fees)
• Negotiate carrier rates at volume
• Use regional carriers when cheaper

How to Increase Your Profit Margins

Strategy 1: Increase Prices (Easiest Win)

Most stores underprice. A 10% price increase with same volume = 10% more profit.

Example:

• Currently: Sell $40, cost $28, profit $12 (30% margin)
• Increase to $44: Sell $44, cost $28, profit $16 (36% margin)
• Result: 33% more profit per sale

How to test pricing:

• Increase prices on 25% of traffic (A/B test)
• If conversion rate drops less than price increase %, you win
• Example: 10% price increase, 5% conversion drop = net gain

Strategy 2: Increase Average Order Value

Same customer acquisition cost spread across larger order = better margins.

Tactics:

• Volume discounts: "Buy 2, save 10%" (increases units per order)
• Free shipping threshold: "Free shipping over $50" (customers add items)
• Product bundles: Pre-made sets at slight discount
• Upsells at checkout: "Add this for just $X more"

Impact example:

• Current AOV: $45, net margin 15% = $6.75 profit
• Increase AOV to $60 (same customer, more items): 20% margin = $12 profit
• 78% more profit per customer

Strategy 3: Reduce Cost of Goods Sold

Negotiate with suppliers:

• At 100+ units/month: Ask for 10-15% discount
• At 500+ units/month: 20-30% discount possible
• Get quotes from 3-5 suppliers, play them against each other

Optimize shipping costs:

• Shopify label discounts (up to 88% off retail)
• Right-sized packaging
• Negotiate carrier rates at 200+ shipments/month

Reduce payment processing fees:

• Use Shopify Payments (lowest fees)
• Avoid PayPal when possible (higher fees)
• Negotiate with Stripe/payment processor at volume

Strategy 4: Decrease Customer Acquisition Cost

Improve ad performance:

• Better ad creative (test 5-10 variations)
• Tighter audience targeting
• A/B test landing pages
• Retarget website visitors (cheaper than cold traffic)

Focus on organic channels:

• SEO (free traffic long-term)
• Email marketing (retain customers)
• Social media (build audience)
• Referral programs (customers recruit customers)

Maximize customer lifetime value:

• Email flows for repeat purchases
• Loyalty programs
• Subscriptions (recurring revenue)

Strategy 5: Cut Unnecessary Expenses

Audit monthly:

• Cancel unused apps (many stores pay for apps they don't use)
• Negotiate annual pricing (20% savings typical)
• Cut underperforming ad campaigns immediately
• Eliminate waste in operations

Profit Margin Red Flags

Under 5% net margin:

• One bad month away from losing money
• Not sustainable long-term
• Fix: Raise prices, cut costs, or pivot

Gross margin under 40%:

• Not enough buffer for marketing and operations
• Fix: Find better suppliers or increase prices

Marketing over 50% of revenue:

• Customer acquisition too expensive
• Fix: Improve conversion rate, build brand, focus on retention

Tracking Profit Margins Over Time

What to Monitor Monthly

• Net profit margin: Is it improving or declining?
• Gross margin: Are COGS creeping up?
• CAC (customer acquisition cost): Marketing spend ÷ new customers
• AOV (average order value): Revenue ÷ orders
• Repeat customer rate: % of revenue from repeat customers

Tools for Tracking

• Shopify Analytics: Built-in reports
• QuickBooks/Xero: Full accounting view
• Lifetimely: Shopify app for profit analytics
• Spreadsheets: Manual tracking (works great for small stores)

Real Examples: Good vs Bad Margins

Example 1: Struggling Dropshipper (Bad Margins)

• Revenue: $20,000/month
• COGS: $8,000 (40%)
• Marketing: $10,000 (50%)
• Other expenses: $500
• Net profit: $1,500 (7.5% margin)

Problem: Marketing costs too high, prices too low. One bad month = losses.

Example 2: Healthy Private Label (Good Margins)

• Revenue: $50,000/month
• COGS: $15,000 (30%)
• Marketing: $12,000 (24%)
• Other expenses: $3,000 (6%)
• Net profit: $20,000 (40% margin)

Success factors: Low COGS (bulk buying), strong brand (efficient marketing), high AOV.

The Bottom Line

Profit margin is everything. A 20%+ net margin gives you breathing room for growth, mistakes, and reinvestment. Under 10%, you're one problem away from trouble.

Focus on:

1. Increasing prices (easiest profit boost)
2. Raising AOV (volume discounts, bundles, upsells)
3. Reducing COGS (negotiate, optimize shipping)
4. Improving marketing efficiency (better ads, organic channels)
5. Cutting unnecessary costs (audit monthly)

Track margins monthly. If they're declining, investigate immediately. If they're healthy, reinvest in growth. Profit margin is the scorecard—everything else is just details.