Everything you need to sell online

Set up an online store in minutes to sell on a website, social media, or marketplaces.

Your Complete Guide to Profit Margins for Retail Businesses

8 min read

“Profit margin” is one of those business-y sounding words that seems a lot more complicated than it really is.

Essentially, a business’s gross profit margin is a measurement of how much money a company is making. For example, if it takes $1 to make a product and you sell it for $2, you’ve got a 50% profit margin.

That’s the basic idea, but let’s be honest: in practice, it’s a little more complicated than that. And there are some factors that influence profit margins that are important to think about. Plus, what is a good profit margin for retail?

We’ve got you covered.

How to sell online
Tips from e-commerce experts for small business owners and aspiring entrepreneurs.
Please enter a valid email address

What Should You Know About Profit Margins?

So we already know that gross profit margin can be calculated by accounting for the cost of production and the final sale price. But what’s the actual gross profit margin formula?

Ok, get ready for some math (stick with us here).

How do you calculate gross profit margin?

First, subtract the cost of goods sold (COGS) from the net sales. Next, divide the resulting number by the net sales to calculate gross profit margin as a decimal. Convert the decimal to a percentage to find gross profit margin. Here’s an example:

  • A business makes $5,000,000 by selling phone cases.
  • While making the phone cases, the company creates $2,000,000 in labor and material costs.
  • To calculate her company’s gross profit margin, the CEO subtracts the COGS from net sales ($5,000,000 minus $2,000,000 = $3,000,000).
  • Next, she divides that resulting number by her company’s revenue to get a decimal ($3,000,000 divided by $5,000,000 = 0.6).
  • After converting the decimal into a percentage, she finds that production costs consume 40% of sales, resulting in a 60% gross profit margin.

Why does Gross profit margin matter?

Gross profit margins are an indicator of your retail business’s health. Understandably, if the margin is too low, you won’t make enough money.

What is Net profit margin?

If you’re learning about gross profit margins, you’ll probably come across “net margins.” So what is a business’s net margin? Think of it like this: Gross profit margin is how much money is left over after subtracting the cost of goods sold, while net profit margin is how much money is left over after accounting for things like operating expenses, debt, and taxes — as well as the COGS.

What Is a Good Profit Margin for Retail?

Profit margins vary from industry to industry — by a lot.

According to data analyzed in January 2021, the advertising industry typically sees gross profit margins of about 24%. Meanwhile, the pharmaceutical industry enjoys margins slightly over 70%. And that wide range doesn’t stop with commercials and drugs.

Gross profit margins by industry

  • Education: 41.15%
  • General Electronics: 26.53%
  • Food Wholesalers: 15.49%
  • Online Retail: 42.53%

So profit margins vary, but what is a good profit margin for retail? While there isn’t a specific number to aim for, you can get a better idea of good profit margins for retail by looking at averages in specific retail industries.

  • Women’s clothing: 46.5%
  • Shoes: 42.6%
  • Supermarkets and Grocery Stores: 28.8%
  • Pet Supplies: 43.6%

So yes, like a lot of things in business, there isn’t a one-size-fits-all answer to “what is a good profit margin for retail?” But ultimately, you really can’t have a gross profit margin that’s too high as long as your business is gaining that capital sustainably. So how do you make sure your profit margin is healthy?

How To Ensure a Good Profit Margin for Retail

What is a good profit margin for retail? It depends on the industry, but the steps to ensuring your business has healthy margins will generally look similar no matter the number you’re aiming for.

To learn about these margin-maximizing strategies, let’s look at what influences profit margins so we know what parts of the business we’re dealing with.

What influences profit margins for retail businesses?

Number one: Operating costs

Operating costs (including things like paying employees, purchasing shipping materials, and savings funds for marketing campaigns) have to be subtracted from your revenue when you calculate your retail business’s net profit margin. If operating costs are too high, the business might not make enough money to function.

Number two: Marketing practices

Poor marketing practices will depend on the business, but if your company is pursuing ads that don’t make the sale or flyers that aren’t connecting with shoppers, your operating costs will go up and your net profit margin will go down.

Number three: Pricing

This one may seem obvious, but pricing really is a big factor in both gross and net profit margins. But don’t just think about prices that are too low. If your company prices its products too high, you might lose potential customers. Sometimes, a low price, high volume business model is best.

How do you create a good profit margin for retail?

You can make sure your business’s profit margins are healthy by looking at wasteful practices associated with the three margin-influencers listed above.

  • First, think about what costs your business money in general and make changes to minimize loss. Be on the lookout for unused or inefficient services, like old accounting software, and find more cost-efficient alternatives.
  • Next, develop a more advanced marketing strategy that prioritizes impactful mediums, such as digital ads. (Ecwid can help if you don’t know where to start.)
  • Finally, avoid missing your ideal pricing target by accounting for factors like the market average, manufacturer recommendations, and customer psychology. Ultimately, prices need to reflect what the shopper is willing to pay.

Profit Margins and Ecommerce

If you’re ready to improve your retail business’s profit margins, expanding into ecommerce might be the right move. Data shows that online retail stores have some of the highest gross and net margins in the retail market — with ecommerce retail enjoying gross margins more than 18% higher than the general market.

 

Table of contents

Sell online

With Ecwid Ecommerce, you can easily sell anywhere, to anyone — across the internet and around the world.

About the author

Max has been working in the ecommerce industry for the last six years helping brands to establish and level-up content marketing and SEO. Despite that, he has experience with entrepreneurship. He is a fiction writer in his free time.

Ecommerce that has your back

So simple to use – even my most technophobic clients can manage. Easy to install, quick to set up. Light years ahead of other shop plugins.
I’m so impressed I’ve recommended it to my website clients and am now using it for my own store along with four others for which I webmaster. Beautiful coding, excellent top-notch support, great documentation, fantastic how-to videos. Thank you so much Ecwid, you rock!
I’ve used Ecwid and I love the platform itself. Everything is so simplified it’s insane. I love how you have different options to choose shipping carriers, to be able to put in so many different variants. It’s a pretty open e-commerce gateway.
Easy to use, affordable (and a free option if starting off). Looks professional, many templates to select from. The App is my favorite feature as I can manage my store right from my phone. Highly recommended 👌👍
I like that Ecwid was easy to start and to use. Even for a person like me, without any technical background. Very well written help articles. And the support team is the best for my opinion.
For everything it has to offer, ECWID is incredibly easy to set up. Highly recommend! I did a lot of research and tried about 3 other competitors. Just try ECWID and you'll be online in no time.

Your ecommerce dreams start here

By clicking “Accept All Cookies”, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts.
Your Privacy

When you visit any website, it may store or retrieve information on your browser, mostly in the form of cookies. This information might be about you, your preferences or your device and is mostly used to make the site work as you expect it to. The information does not usually directly identify you, but it can give you a more personalized web experience. Because we respect your right to privacy, you can choose not to allow some types of cookies. Click on the different category headings to find out more and change our default settings. However, blocking some types of cookies may impact your experience of the site and the services we are able to offer. More information

More information

Strictly Necessary Cookies (Always active)
These cookies are necessary for the website to function and cannot be switched off in our systems. They are usually only set in response to actions made by you which amount to a request for services, such as setting your privacy preferences, logging in or filling in forms. You can set your browser to block or alert you about these cookies, but some parts of the site will not then work. These cookies do not store any personally identifiable information.
Targeting Cookies
These cookies may be set through our site by our advertising partners. They may be used by those companies to build a profile of your interests and show you relevant adverts on other sites. They do not store directly personal information, but are based on uniquely identifying your browser and internet device. If you do not allow these cookies, you will experience less targeted advertising.
Functional Cookies
These cookies enable the website to provide enhanced functionality and personalisation. They may be set by us or by third-party providers whose services we have added to our pages. If you do not allow these cookies then some or all of these services may not function properly.
Performance Cookies
These cookies allow us to count visits and traffic sources, so we can measure and improve the performance of our site. They help us know which pages are the most and least popular and see how visitors move around the site. All information these cookies collect is aggregated and therefore anonymous. If you do not allow these cookies, we will not know when you have visited our site.