Gross Margin vs Net Profit in Ecommerce: Why 60% Becomes 16%
Gross margin is the percentage of revenue left after only the product cost (COGS). Net profit is what remains after every cost: COGS, fulfillment, platform and payment fees, advertising, and returns. A store can show a 60% gross margin and still net only 10% to 16%, because the gap between the two is where fees, shipping, and ad spend quietly eat the profit.
The gap that surprises most sellers
Imagine a $50 product that costs you $15 to make. On paper that is a 70% gross margin, which sounds excellent. But that number ignores almost everything it actually takes to deliver the order. Once you add outbound shipping, a marketplace fee, payment processing, ad spend to acquire the customer, and a reserve for returns, the true net profit can fall to a few dollars.
This is the single most common reason profitable-looking stores run out of cash. They price against gross margin and forget that gross margin is not money in the bank.
The two numbers defined
- Gross margin = (Revenue minus COGS) divided by Revenue. COGS is only the direct cost of the goods: manufacturing, materials, and inbound freight.
- Net profit margin = (Revenue minus ALL costs) divided by Revenue. That includes COGS plus fulfillment, platform and payment fees, advertising, and a return reserve.
- Contribution margin sits in between: revenue minus all variable costs except advertising. It is the money available to pay for ads and still profit.
A worked example
Take that $50 product with $5 shipping collected, so $55 in revenue. Subtract $15 COGS, $6 outbound postage, a 6.5% marketplace fee plus payment processing (about $5), $8 in ad spend, and a 4% return reserve (about $2.20). You are left with roughly $12 to $14 of net profit, or a net margin in the mid-teens, not 70%.
Rule of thumb: if you only track gross margin, assume your real net margin is 30 to 50 percentage points lower once fees, shipping, and ads are counted.
Why the distinction matters
Advertising is usually the swing factor. Gross margin tells you how much room you have to spend acquiring a customer; net margin tells you whether you actually profited after spending it. If your break-even ad spend is $14 and you are paying $16 to acquire each order, you lose money on every sale even though the gross margin looked generous.
Pricing, discounting, and channel decisions should all be made against net margin, not gross margin. A 20% off promo that looks harmless against a 70% gross margin can wipe out a 15% net margin entirely.
Frequently asked questions
Is a 60% gross margin good for ecommerce?
It is a healthy starting point, but it says little about profit on its own. Whether 60% gross margin leaves you profitable depends entirely on your shipping, fees, ad efficiency, and return rate.
What net profit margin should I aim for?
Most ecommerce stores run 8% to 15% net margin, with 20% or more considered strong. Below 10% leaves you exposed to ad cost increases and shipping hikes.
Are payment processing fees part of COGS?
No. Card processing is a variable operating expense, not cost of goods sold. COGS is limited to the direct cost to produce or acquire the item.
Related tools & guides
MerchSites tools and guides are written and reviewed by ecommerce practitioners. Calculations are cent-accurate estimations based on reported platform fees and standard formula math.