Profit & margins
What are overhead costs in an online business?
Business overheads are the costs of running your store that aren't tied to any single product or order: software and app subscriptions, salaries, rent, accounting and insurance. You pay them whether you sell 10 orders or 10,000. Overheads aren't part of cost of goods sold, but they come out of gross profit before you reach operating profit.
What counts as business overheads in an online store
| Category | Examples |
|---|---|
| Platform and software | Shopify plan, apps, email marketing platform, design tools, accounting software |
| People | Salaries, contractors, virtual assistants, agency retainers |
| Premises | Rent, utilities, storage you pay for regardless of volume |
| Professional services | Accountant, bookkeeper, legal |
| Insurance and admin | Business insurance, bank fees, domain and hosting |
What isn't overhead:
- Cost of goods sold: the landed cost of the products you sell.
- Variable selling costs: ad spend, shipping, packaging and payment fees, which rise and fall with sales.
Fixed vs variable costs
| Fixed costs | Variable costs | |
|---|---|---|
| Change with sales? | No, at least in the short term | Yes, roughly in line with orders |
| Examples | Rent, salaries, software plans | COGS, shipping, payment fees, ad spend per order |
| Per-order cost as you grow | Falls | Stays about the same |
Most overheads are fixed. That's why growing sales usually improves profit margins: the same overheads are spread over more orders. Some costs are semi-variable, such as an app that charges more once you pass an order limit.
The overhead rate formula
The simplest way to track overheads is as a share of revenue:
Overhead rate % = Total overhead costs ÷ Revenue × 100 Overhead per order = Total overhead costs ÷ Number of orders
Worked example: one monthExample numbers
| Overhead | Amount |
|---|---|
| Apps and software | $600 |
| Salaries and contractors | $6,000 |
| Other overheads (accounting, insurance, storage) | $1,200 |
| Total overheads | $7,800 |
With net revenue of $47,000 and 625 orders:
- Overhead rate = $7,800 ÷ $47,000 = 16.6%
- Overhead per order = $7,800 ÷ 625 = $12.48
Every order needs to bring in at least $12.48 of profit after product costs, ads and shipping just to cover overheads.
Enter your overheads in the calculator's "other costs" field to see profit after them.
How overheads fit into profit
Gross profit = Revenue − COGS Operating profit = Gross profit − Variable selling costs − Overheads
Using the same month: gross profit of $28,000, minus variable selling costs of $13,600 (ads, shipping and fees), minus overheads of $7,800, leaves $6,600 of operating profit. The guide to the operating profit formula walks through it line by line.
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- Audit subscriptions quarterly. Cancel apps you no longer use, and check whether you're on the right plan tier.
- Watch the overhead rate, not just the total. Overheads can grow as long as revenue grows faster.
- Prefer variable costs while you're small. A 3PL that charges per order is often safer than leasing warehouse space too early.
- Review hires against profit, not revenue. A new salary needs enough extra gross profit to pay for itself.
- Know your break-even. Divide monthly overheads by your profit per order after variable costs to see how many orders you need just to break even. The contribution margin calculator shows profit per unit after variable costs.
For how overheads affect the ratios investors and lenders look at, see profitability ratios for ecommerce.
FAQ
What is an overhead in business?
An overhead is a cost of running the business that isn't tied to making or delivering a specific product or order, such as software subscriptions, salaries, rent and accounting fees. You pay it whether you sell a lot or a little.
Are overheads fixed or variable costs?
Mostly fixed in the short term, like rent and salaries. Some overheads are semi-variable, such as app plans that move up a tier as your order volume grows.
Is ad spend an overhead?
Usually not. Ad spend is a variable marketing cost that rises and falls with how much you choose to sell. Most stores track it separately from overheads, because it behaves very differently.
What's a good overhead rate for an online store?
There's no universal figure. What matters is that gross profit, minus variable costs like ads and shipping, covers your overheads with room to spare. A falling overhead rate as you grow is a good sign.