Gross margin vs net margin: what is the difference?
Gross margin is the share of your sales left after the cost of the products you sold. Net margin is the share left after every other cost too: shipping, card fees, ads, software, wages, interest and tax. Sell $20,000 and keep $12,000 after product cost, and gross margin is 60%. If $1,200 survives everything else, net margin is 6%.
How do you calculate gross margin and net margin?
Gross margin = (net sales minus cost of goods sold) ÷ net sales × 100. Net margin = net profit ÷ net sales × 100. Net sales are sales after discounts and returns, and net profit is what remains after cost of goods sold, running costs, interest and tax, as Shopify's net profit margin guide lists them.
Gross margin vs net margin: an example
Say a month brings 400 orders of $50, and each product costs you $20.
| Line | One month |
|---|---|
| Sales (400 orders at $50) | $20,000 |
| Minus product cost (400 × $20) | $8,000 |
| Gross profit, a 60% gross margin | $12,000 |
| Minus shipping, card fees and packaging (400 × $10) | $4,000 |
| Minus ads | $3,000 |
| Minus wages, apps and software | $3,300 |
| Minus interest and tax | $500 |
| Net profit, a 6% net margin | $1,200 |
The gross margin says 60¢ of each sales dollar is left after product cost. The net margin says you keep 6¢.
What does the gap between gross and net margin tell you?
Net margin is almost always the lower of the two, because it takes off more costs. A wide gap between them, like the example's 60% against 6%, points at what your store costs to run, such as ads, software and wages. A thin gross margin points at price or product cost.
Which costs count toward gross margin on Shopify?
Shopify works out gross margin, one of the eight ecommerce KPIs, from the "Cost per item" you enter on each product: what the product costs you, without shipping or taxes. A sale of a product with no cost entered at the time is left out. To see the result, open Analytics, then Reports, set the Category filter to Profit Margin and open "Gross profit by product". Net margin comes from your accounting records, since it needs wages and software.
Shipping, card fees and packaging can go either way. File them under cost of goods sold and the example's gross margin falls from 60% to 40%, which is the contribution margin. Net margin stays at 6%. Compare gross margins only when both count the same costs.
Products you put first, with Sledge
Sledge does not read your product costs or work out margin. You know which products keep more of each sale, and the "Pin" strategy in Merchandising holds the ones you choose at the top of a collection. On any paid plan, Growth Intelligence totals what its suggested fixes could add as one dollar figure, "Est. potential": a sales estimate, not a margin.
