How to Find Product Gross Margin
While gross margins vary widely by product and industry, a survey of ecommerce companies by Marketing Sherpa found the average gross margin of products is 30% for smaller online stores and 37% for larger ecommerce businesses.
What is Gross Margin?
For example, if you sell a product for $10.00 and it cost you $6.00 to make, you’ve made a gross profit of $4.00. Your gross margin would be 40%.
How do you calculate Gross Margin?
Selling Price – Cost of Goods Sold = Gross Margin
Cost of Goods Sold, or COGS, refers to the expenses that are directly associated with your product, including raw materials, packaging and factory overhead. For details on how to accurately calculate COGS and why it’s important for your ecommerce store, click here.
Improving Gross Margin
You’ll want to look at the two variables that determine gross margin: Cost of Goods Sold and Selling Price. There are several options for reducing Cost of Goods Sold and increasing margins:
- Buying products or material in bulk
- Renegotiate with your suppliers
- Contract with a different supplier
- Streamline and automate your inventory process
- Eliminate waste where you have control
Raising product pricing is not ideal for every situation but it is one way to improve your margins. Even the smallest increase in price can have a significant impact on your bottom line, especially with high volume products.
You’ll also want to review the discounts you are offering. While an attractive coupon or promotion may increase sales volume, if your margin is next to nothing you could be robbing yourself of profit just to pay your bills. If there is a product with consistently low margins, it’s worth considering whether or not to continue selling the product altogether.
Monitor Margin Erosion
- Competitive price pressures which force low markups
- Vendor and supplier price increases
- Unanticipated shifts in sales toward low-price, low-margin products
- Fluctuations in inventory levels
- Seasonal changes
Ongoing Margin Analysis
Store owners or senior management should also be involved in setting an overall profit margin strategy, including putting into place reporting and controls to monitor margins on a regular basis.
Glew Helps with Cost of Goods Sold
Our tool allows users to import COGS data in bulk using a CSV template, and also provides the ability to modify COGS data for individual products.
Integrated Cost of Goods Sold data in Glew helps ecommerce stores optimize advertising spend relative to product profitability and move away from a generalized approach to product marketing.