The three formulas
One month, three answers
An illustrative store month:
| Line | Amount |
|---|---|
| Revenue | $20,000 |
| Product cost | $7,000 |
| Payment and platform fees | $600 |
| Shipping and fulfilment | $1,800 |
| Refunds | $800 |
| Ad spend | $6,000 |
| Fixed costs (apps, tools, staff) | $1,500 |
| Margin | Working | Result |
|---|---|---|
| Gross | ($20,000 - $7,000) / $20,000 | 65% |
| Contribution | ($20,000 - $7,000 - $600 - $1,800 - $800 - $6,000) / $20,000 | 19% |
| Net | ($3,800 - $1,500) / $20,000 | 11.5% |
Gross margin says 65%. The store keeps 11.5%. Nothing was hidden; the costs between gross and net are simply the ones that grow with every order you buy with ads.
Which one to watch
Contribution margin decides whether more sales make you more money. If it is thin, scaling ad spend scales the thin part too. Gross margin is useful for comparing products; net margin tells you what the month was worth.
Go further
Profit Stability System
$97 · 30-day money-back guarantee
A guided tool, no spreadsheets: find your biggest profit leak, get the prices, SKUs and campaigns to change, and watch margin and cash month over month.
Guides you from your biggest leak to the prices, SKUs and campaigns to change.
Profit Recovery Checklist
$9 · 30-day refund
A 10-point audit, an interactive tool and a printable PDF, with a contribution margin calculator, for margin, refund and conversion leaks.
Questions
What is the formula for profit margin?
Net profit margin = (revenue minus all costs) / revenue. Gross margin only subtracts product cost; contribution margin also subtracts fees, shipping, refunds and ad spend.
What is contribution margin in ecommerce?
What revenue leaves after the costs that grow with each order: product cost, fees, shipping, refunds and ad spend. It decides whether more sales add profit.
Is a 65% gross margin good?
It depends on the costs below it. In the worked example a 65% gross margin became 11.5% net once fees, shipping, refunds, ads and fixed costs were paid.