What Is a Good Profit Margin for Retail?

If you are asking yourself, “What is a good profit margin for retail?” you’ve come to the right post. 

Whether you’re a brand-new online fashion brand or an established jewelry retailer, your profitability will be the key to long-term growth. However, even the slightest optimization tweak can make or break your profit margins and affect your success. 

The key to doing that is knowing just the right profit margin you are aiming for. In this post, we will help you determine just that. Here is what we will cover: 

• Gross profit margins for eCommerce
• Net profit margins for eCommerce
• Key profit influences 
• Determining a good profit margin for your store 
• 5 ways to instantly improve your profit margins

Let’s jump in. 

Gross Profit Margins for eCommerce 

Gross margin is the profit your company makes after deducting the direct costs associated with producing or purchasing the products you sell.

Your gross margin profit is a principal benchmark for a successful online retail store and your business’s overall health. In terms of eCommerce, gross profit margins typically range between 40% and 60%, depending on the industry or market you’re selling in and your strategies. 

However, there is a range of factors that make it fall well below this range, such as: 

• Product niche 
• Competition
• Pricing strategies
• Operational efficiency

How to Calculate Gross Profit Margin 

The formula for calculating your gross profit margin is: 

Here's a breakdown of the formula:

1. Gross profit. Gross profit is the difference between your total revenue (or sales) and the cost of goods sold (COGS).
2. Revenue. Revenue is the total amount of money generated from sales.

For example, if your retail brand has $500,000 in revenue and $300,000 in COGS, your gross profit would be $200,000.  

Therefore, your gross profit margin would be 40%. This means that for every dollar in revenue your business earns, you retain 40 cents as gross profit after accounting for the cost of goods sold. 

But this is not the full picture. You need to factor in other important things to determine your profitability. 

Net Profit Margins for eCommerce

Net profit margins (also sometimes referred to as net income or net earnings) take into account more than just your COGS. Instead, it factors in all your business or product expenses, including debt, taxes, operating expenses, etc. 

How to Calculate Net Profit Margin 

To calculate net profit margins, online retailers should use the following formula: 

Here's a breakdown of the formula:

1. Net profit. This is the total profit or net income your company earns after deducting all operating expenses, including COGS, operating costs (like marketing, salaries, rent, and utilities), interest, and taxes.
2. Revenue. This is the total income your business generates from sales.

Let’s use the same example. Your retail brand has $500,000 in revenue and $300,000 in COGS, $100,000 in operating expenses, $20,000 in interest, and $30,000 in taxes. 

Your gross profit would be $200,000, and your net profit would be ($200,000 − $100,000 − $20,000 − $30,000) = $50,000.

Your net profit margin would be 10%.

Key Profit Influences 

What influences profit margins for retail businesses? There are three main factors. Let’s take a look at each. 

Pricing 

How you price your product will, of course, directly affect your gross and net profit margins. Price your products too low, and you will run at a loss. Price too high, and you could price your online retail store out of the market. It’s a balancing act that should also factor in the market and sales volume potential.  

Operational Costs 

The next factor influencing your profitability is your operation costs. Whether it’s the cost of raw materials and warehousing staff or the SaaS tools you use to streamline your business, all these operational expenses will affect your net profit margins. 

Marketing Strategies

Lastly, your merchandising and marketing strategies also dramatically affect your profitability. Poor marketing strategies not only drive up costs but drive down sales and revenue — as you won’t be showing the right shopper the right product at the right time to push conversions. Here are some guides we have to help you improve just that: 

1. How Online Retail Product Recommendations Affect Sales Growth
2. #1 Marketing Hacks from Leading Shopify Experts
3. Most Important Digital Touchpoints for eCommerce Stores and How to Optimize Them
4. 3 Must-Have Product Discovery Strategies for Shopify Plus Stores

Determining a Good Profit Margin for Your Store 

Now that we have reviewed what affects your profit margins, it’s time to answer the key question: What is a good profit margin for retail? 

Well, it depends on the industry you’re selling in and the key profit influences for your specific brand. However, let’s talk generally for a minute. 

According to the NYU Stern School of Business, eCommerce's average profit margin (gross) is 41.54%, while Shopify puts the net profit margin average for online retailers at 10%. 

Let’s have a look at some benchmarks for gross profit margins, by industry, from FullRatio. 

You will also need to consider whether you are a small business or a huge retailer and where you are in your business development. 

Having said all that, you will need to determine what the best profit margin for your specific products are and then optimize key influences to drive them. 

Let’s look at some of the ways you can instantly improve your profit margins. 

5 Ways to Instantly Improve Your Profit Margins.

Whether you're looking to improve net sales and increase lower profit margins, here are five strategies you can use to drive profit margins: 

1. Embrace automation and machine learning 
2. Boost AOVs 
3. Streamline eCommerce operations 
4. Lower product costs
5. Increase product prices 

Let’s look at each in more detail. 

1. Embrace Automation and Machine Learning

Who doesn’t want a high profit margin? In today’s competitive market, though, you won’t be able to reach peak profitability performance without automation and machine learning. 

With the right automation in place, you can pivot to market changes in real-time to keep expenses down, thus increasing profits while also ensuring your marketing strategies are tailored to specific shoppers. 

Here are some key areas you can add automation and machine learning tools to drive profitability: 

1. Marketing 
2. Advanced merchandising 
3. Inventory optimization 
4. Backend Management 

2. Boost AOVs 

Your AOVs (average order values) can go a long way to maintaining a healthy profit margin for your online retail store. Why? Because the higher your AOVs are, the higher your revenue and the lower the cost will be for each sale.

When you increase your AOVs it means your customers are buying more with each sale, without increasing transaction costs or resulting in higher marketing expenses. This means more revenue for less costs, which in turn results in higher profit. 

Additionally, strategies that drive AOVs help you move more inventory in order to diminish the expense of slow-moving and dead stock. 

Here are just some of the ways you can increase AOVs: 

• AI-powered product recommendations
• Social proof 
• Cross-selling 
• Upselling 
• Product bundling 
• Loyalty programs 
• Marketing personalization 
• MOQs (minimum order quantities) 
• Bulk discounts 

3. Streamline eCommerce Operations 

By boosting online retail operation performance, you can decrease operational costs and improve profit margins. 

Not only does it help you keep expenses low, but it will also ensure you can get the right product to the right customer as efficiently as possible. This will limit returns while boosting retention.

For instance, by implementing a more efficient inventory management system, you can reduce holding costs, minimize stockouts, and thus increase overall profitability. This could be done by streamlining any of the following: 

• Demand forecasting 
• Supplier relationships
• Holding costs
• Order fulfillment efficiency 

4. Lower Product Costs 

Another way to increase business profit margin is to consider lowering your product costs. As we saw in the gross and net profit margin formula, COGS play a crucial role in overall profitability. Simply put, the less you are spending on your inventory, the higher your profit margins will be. 

So, how can you lower the cost of goods sold to fix a lower profit margin? Here are some ways to get you started: 

1. Supplier negotiation. Approach your supplier to see if you can renegotiate product or raw material prices. You can also ask for sales volume discounts, where the more you order, the higher the discount you can get. 
2. Inventory management. Reduce operational costs and improve cash flow by implementing  just-in-time inventory strategies. This will minimize storage costs while reducing the risk of slow-moving goods eating net profits. 
3. Quality control. Upgrade quality control strategies to help eliminate wastage from defective products — this can be a huge expense. This will also go a long way to making manufacturing more efficient, which will help reduce net costs. 
4. Technology integration. By using advanced tools, such as Kimonix, you can utilize technology to boost sales while optimizing inventory levels and eliminating dead stock. 

5. Increase Product Prices 

Your last point of call to push for a high profit margin would be increasing your product prices. However, before you do, you will want to ensure you have done a lot of research, in terms of market competition. 

You may also find it easier to add product variants that are priced higher, rather than increasing the price of products customers already know and love. After all, what's the point of lowering your operating expenses and increasing your net margin but then losing retention — shoppers actually buying what you're selling. 

Here are the four most important tips you will want to implement before increasing product prices on your online retail store:

1. Focus on value communication and brand building. Clearly communicate the value of your products and invest in building a strong brand image to justify higher prices.
2. Invest in satisfaction. Make sure you are continuously optimizing your product quality and customer experience to ensure customers see the value in what they are getting versus what they are paying. 
3. Introduce bundled products. Offer exclusive or bundled products that can't be found elsewhere, providing added value to customers.

Wrap Up 

We hope we have answered the question of what a good profit margin is for retail and showed you how you can increase profit margins for your specific brand. 

Whichever strategy you choose to lower operation costs or increase net profit, remember to tailor it to your specific brand, market, and customer — and to be ready to pivot in real-time.