Shopify profit margin calculator searches have been on the rise over the last 18 months, because most Shopify merchants are finally starting to realize that their true margin is not what their analytics dashboard reports. While Shopify reports Revenue – Cost of Goods Sold (which we refer to as Gross Margin), Profit is what you have left over after payment fees, shipping costs, return / refund rates, ad spend, subscription rates, and taxes.
We’ve built a free calculator to do the maths that Shopify doesn’t. This calculator lets you factor in the cost of the product, your payment processor fees, the fees charged for each transaction by Shopify (if you’re not using Shopify Payments), shipping and returns all in one pass. You just have to type in the numbers and see what your real margin actually is.
This guide breaks down the formulas, forgotten costs for merchants, the difference between gross and net margin, and includes a few examples of how the actual margin can differ from what is reported on the dashboard.
In this post
- Gross vs net margin
- COGS, the full definition
- Shopify and processor fees
- Shipping and returns
- Real margin formulas
- Worked examples
- FAQ
Gross vs net margin
Gross margin shows gross profit as a percentage of revenue. Net margin (return on sales) shows profit (net income) as a percentage of revenue. Typical Shopify store difference: up to 20%. Show gross at parties and tell people the lie.
| Metric | Formula | Typical Shopify value |
|---|---|---|
| Gross margin | (Revenue – COGS) / Revenue | 50 to 70% |
| Contribution margin | Gross margin – variable costs per unit | 30 to 50% |
| Net margin | Profit / Revenue after everything | 5 to 15% |
COGS, the full definition
Cost of goods sold is not just the wholesale price. It includes:
- Product cost from the supplier
- Inbound shipping (to your warehouse)
- Import duties and customs
- Packaging (box, tissue, insert, sticker)
- Pick and pack labor or 3PL fulfillment fee
Most Shopify merchants do not report their supplier cost, which understates their COGS and overstates their profit margin. The new Profit Margin Calculator allows merchants to add in the fully loaded cost to the field provided for COGS to reflect the correct figure.
Shopify and payment processor fees
Two fees hit every Shopify order:
- Payment processor fee. Shopify Payments charges 2.9% + 30 cents (Basic plan US) down to 2.4% + 30 cents (Advanced). PayPal is similar. Stripe similar. International cards add 1.5%.
- Shopify transaction fee. If you use a third party gateway instead of Shopify Payments, Shopify adds 0.5% to 2% on top. This is pure overhead.
On a $50 order at 2.9% + 30 cents, PayPal charges $1.75 as the processor fee. And then you also pay Shopify a 2% transaction fee, which equals $1.00. For someone running a business, that is a 5.5% loss on gross margin before you even look at other costs on the platform. The Fee Calculator calculates the processor fee separately if desired.
Shipping and returns
Free shipping is not free. Either the customer pays it in the product price or you pay it out of margin. Most stores blend the two and still undercount. A 6 dollar ship cost on a 50 dollar order for example is 12% of the revenue on that order. If your gross margin on the product was 6 dollars or 60% for example, your margin just got cut in half to 48%.
Returns on your clothing investment won’t be as good as returns on a regular fashion store. Let’s say a regular fashion store gets a 10% return on investment. This means 1 in 10 orders gets refunded, which means you have to pay for outbound and possibly inland shipping, and then you might get some restocking, but the item probably won’t sell for as much on the outlet side as it did on the regular side. A good rule of thumb on returns is to multiply your return on investment by 1.5x to see the true drag on your bottom line.
The fastest way to lower returns in visual categories is accurate variant images. If the customer sees the actual shade of blue they are buying, they return less. This is exactly what Rubik Variant Images does for you on the product page. For stores with 10+ colors of the same item as separate products, Rubik Combined Listings helps you list all of them as combined listings on a single page with color swatches so customers can compare all options side by side before they buy.
Real margin formulas
Contribution margin per order = Price – COGS – Processor fee – Shipping cost – (Return rate * Price * 1.5)Contribution margin is a meaningful statistic, it tells you how many widgets you get to keep after paying for everything else to ship one widget to your customer.
Net margin is equal to (Contribution margin x Orders) – (Fixed costs of the company (apps, ads, salaries)) / Revenue.
Go ahead and insert your numbers into the Profit Margin Calculator. It will show you your profit per order and profit per month all at once.
Worked example
Product priced at $35. Supplier fee to source was $9. Inbound shipper fee was $1. Packaging fee was $1.50. 3PL pick and pack fee was $3 per unit. Fully loaded COGS were Douglas Partnership of $14.50.
- Gross margin: (35 – 14.50) / 35 = 58.5%
- Processor fee (2.9% + 30c): 1.32
- Outbound shipping (subsidized, store eats 4): 4.00
- Return drag (8% rate x 1.5 x 35): 4.20
- Contribution margin: 35 – 14.50 – 1.32 – 4.00 – 4.20 = 10.98, or 31.4%
Whittle away the headline margin of 58.5%. Reality is 31.4%. Nearly half of the margin vanishes in steps most retailers are unaware of.
Related free tools
These 4 calculators cover almost every cost-related question a Shopify store has in year 1: Profit Margin Calculator, Break-Even Calculator, Fee Calculator, and ROAS Calculator. Pair these together for a complete 4 tool stack.
See the live demo store, watch the tutorial video, or read the getting started guide.
FAQ
What is a good profit margin for a Shopify store?
Working on a product ecommerce store, a healthy net margin should be around 10 to 20%. Below 5% is very fragile. Above 25% is excellent, typically indicative of a very strong brand.
Does Shopify show net margin in the dashboard?
Shopify reports gross margin based on the cost per item field, and therefore does not factor in payment fees, shipping, or returns when calculating this value.
What fees does Shopify Payments charge?
2.9% + 30 cents on Basic (US), 2.4% + 30 cents on Advanced, 1.5% international surcharge (varies by country).
Should I include my own time in COGS?
For a one person business the answer is yes, at least partially. Not showing investment in non labor for a one person business paint a very false picture.
How do I reduce return costs?
High quality product images, accurate sizing, Variant Images and clear returns policy.
What is the difference between gross and contribution margin?
Gross margin only deducts COGS from revenue, while Contribution margin additionally subtracts the variable costs per order (processor fees and shipping).
How often should I recalculate my margin?
These numbers change for supplier cost, shipping cost, and processor fees. At least quarterly.
