Profit & margins
Profitability ratios for ecommerce
Profitability ratios measure how much profit a business makes relative to its sales, costs or investment. For an online store, the essential ones are gross, operating and net margin, plus three that matter most in ecommerce: contribution margin, ROAS and POAS for ad channels, and return on inventory investment.
The profitability ratio formulas
All the examples below use one month for an example Shopify store: net revenue $47,000, COGS $19,000, operating expenses $21,400 and net profit $5,100.
Gross margin
Gross margin % = (Revenue − COGS) ÷ Revenue × 100
($47,000 − $19,000) ÷ $47,000 = 59.6%. Gross margin shows whether your pricing and product costs work. See the guide to gross profit margin.
Operating margin
Operating margin % = Operating profit ÷ Revenue × 100
$6,600 ÷ $47,000 = 14.0%. Operating margin shows how efficiently the store runs, after ads, shipping, staff and overheads. See the operating profit formula.
Net margin
Net margin % = Net profit ÷ Revenue × 100
$5,100 ÷ $47,000 = 10.9%. Net margin is what the business keeps after interest and taxes. See the net profit formula.
Contribution margin
Contribution margin = Revenue − Variable costs Contribution margin ratio = Contribution margin ÷ Revenue
Variable costs here are COGS, ads, shipping and payment fees: $19,000 + $8,000 + $4,200 + $1,400 = $32,600. Contribution margin = $47,000 − $32,600 = $14,400, a ratio of 30.6%. That's what each sales dollar contributes toward fixed overheads and profit.
Contribution Margin per SKU CalculatorWhat a single SKU actually contributes after COGS, shipping, and fees.Channel profitability: ROAS and POAS
Ads are usually an online store's biggest variable cost, so measure each channel on its own.
ROAS = Revenue attributed to ads ÷ Ad spend POAS = Gross profit from ad sales ÷ Ad spend
Suppose $32,000 of the month's revenue is attributed to the $8,000 of ads:
- ROAS = $32,000 ÷ $8,000 = 4.0
- Gross profit from ad sales = $32,000 × 59.6% = $19,072
- POAS = $19,072 ÷ $8,000 = 2.38
A POAS above 1 means ad-driven sales earn more gross profit than the ads cost. ROAS alone can't tell you that without your margin. The guide to ROAS covers break-even ROAS and target-setting.
Return on inventory investment (GMROI)
Inventory is cash you've already spent. Gross margin return on inventory investment shows how much gross profit each dollar in stock earns over a year:
GMROI = Annual gross profit ÷ Average inventory at cost
If the example store makes $28,000 of gross profit a month ($336,000 a year) and holds $80,000 of inventory on average, GMROI = $336,000 ÷ $80,000 = 4.2. Each dollar in stock earns $4.20 of gross profit a year.
GMROI falls when stock sits too long. The guide to days inventory outstanding shows how to measure that.
Want this tracked automatically, every day?See which Google Ads campaigns actually make money, measured on real profit (POAS), not just revenue.Try Selvra OSAll the ratios at a glance
| Ratio | Formula | Example | Tells you |
|---|---|---|---|
| Gross margin | (Revenue − COGS) ÷ Revenue | 59.6% | Whether pricing and product costs work |
| Contribution margin ratio | (Revenue − Variable costs) ÷ Revenue | 30.6% | What's left to cover overheads |
| Operating margin | Operating profit ÷ Revenue | 14.0% | How efficiently the store runs |
| Net margin | Net profit ÷ Revenue | 10.9% | What the business keeps |
| ROAS | Ad revenue ÷ Ad spend | 4.0 | Revenue efficiency of ads |
| POAS | Ad gross profit ÷ Ad spend | 2.38 | Whether ads are profitable |
| GMROI | Annual gross profit ÷ Average inventory | 4.2 | Return on cash tied up in stock |
How to use profitability ratios
- Track trends, not single months. A one-off promotion can distort any month.
- Diagnose top-down. If net margin falls, check operating margin; if that fell, check gross margin and POAS to see whether pricing, product costs or ads moved.
- Compare with your own targets, and with sourced industry figures where available. See what a good profit margin is.
FAQ
What are the main profitability ratios?
Gross margin, operating margin and net margin are the core three. Online stores should add contribution margin, profit on ad spend (POAS) and gross margin return on inventory investment (GMROI), because ads and inventory are their biggest levers.
What's the difference between a margin and a markup?
A margin divides profit by price or revenue; a markup divides profit by cost. Profitability ratios are almost always margins.
How often should I calculate these ratios?
Monthly for the margins, so you can spot trends. ROAS and POAS can be checked weekly per campaign. GMROI is most useful quarterly or yearly, because inventory takes time to turn.
Which ratio matters most?
Operating margin gives the clearest view of how the store itself performs. Gross margin and POAS explain why it's moving.