Profit Margins

Profit margins in MerchantFlow measure your true profitability at every level -- from individual products to your entire business. MerchantFlow calculates gross margin, contribution margin, and net margin so you can identify which products actually make money, which drag on your bottom line, and where to focus optimization efforts.

What Are the Margin Types?

Gross Margin

The percentage of revenue remaining after subtracting the cost of goods sold:

Gross Margin = (Revenue - COGS) / Revenue

Example:

• Revenue: $50,000
• COGS: $20,000
• Gross Margin: ($50,000 - $20,000) / $50,000 = 60%

What it tells you: How efficiently you are producing or sourcing products. A higher gross margin means more money left to cover other expenses.

Contribution Margin

The percentage of revenue remaining after subtracting all variable costs:

Contribution Margin = (Revenue - Variable Costs) / Revenue

Variable costs include COGS, ad spend, payment processing fees, shipping, and fulfillment costs.

Example:

• Revenue: $50,000
• COGS: $20,000
• Ad Spend: $5,000
• Payment Fees: $1,500
• Shipping: $2,000
• Contribution Margin: ($50,000 - $28,500) / $50,000 = 43%

What it tells you: How much each sale contributes toward covering fixed costs and generating profit.

Net Margin

The percentage of revenue remaining after subtracting all expenses:

Net Margin = (Revenue - All Expenses) / Revenue

Net margin includes everything: COGS, ad spend, payment fees, tax, shipping, fulfillment costs, expense amortization, refunds, and all other operating expenses.

Example:

• Revenue: $50,000
• Total Expenses: $42,000
• Net Margin: ($50,000 - $42,000) / $50,000 = 16%

What it tells you: Your true bottom-line profitability after every cost is accounted for.

How to Access Profit Margin Data

Dashboard > Profit

Navigate to your profit dashboard to see overall margin metrics:

• Gross margin percentage and trend
• Net margin percentage and trend
• Margin comparison over time
• Margin by product category

Product Details Pages

View individual product profitability:

1. Go to Dashboard > Products
2. Click on any product
3. See margin breakdown for that specific product

Daily P&L Breakdown

For granular analysis, navigate to Dashboard > P&L > Daily Breakdown to view a day-by-day P&L that includes:

• Gross Revenue - total sales before deductions
• Net Revenue - revenue after refunds and discounts
• COGS - cost of goods sold
• Gross Profit - revenue minus COGS
• Ad Spend - advertising costs
• Payment Fees - payment processor charges
• Tax - tax obligations
• Shipping - shipping costs
• Fulfillment Costs - warehousing and fulfillment fees
• Expense Amortization - recurring expenses spread over time
• Refunds - returned order amounts

Requirements for Margin Calculations

COGS Must Be Configured

Profit margin calculations require Cost of Goods Sold data. Without COGS, MerchantFlow cannot calculate gross margin or any downstream margin metrics.

To set up COGS:

1. Go to Dashboard > P&L > COGS
2. Add costs using bulk update, individual entry, or Shopify sync
3. Aim for at least 80% revenue coverage

COGS Management Guide

Ad Platforms Should Be Connected

For accurate contribution and net margins, connect your ad platforms so ad spend is automatically included in calculations.

Ad Spend Tracking

How to Analyze Product-Level Profitability

Identify Profitable Products

Sort products by margin to find your best performers:

• Products with the highest gross margin
• Products with the best contribution margin after ad spend
• Products generating the most total profit (margin x volume)

Spot Unprofitable Products

Find products that are losing money:

• Negative margins after COGS
• Products where ad spend exceeds contribution
• Items with high refund rates eating into margins

Take Action Based on Product Data

• High margin, high volume - promote and scale
• High margin, low volume - increase marketing
• Low margin, high volume - optimize costs or raise prices
• Negative margin - discontinue or restructure pricing

Profit Margin Benchmarks by Industry

Profit margins vary significantly by industry:

Use these as guidelines, not rules. Your specific margins depend on your business model, scale, and cost structure.

Strategies for Improving Margins

Increase Revenue per Unit

• Raise prices strategically
• Add upsells and cross-sells
• Create bundles with higher perceived value
• Reduce discounting

Reduce COGS

• Negotiate better supplier terms
• Order in larger quantities
• Source alternative suppliers
• Optimize packaging and shipping from supplier

Lower Variable Costs

• Improve ad targeting and ROAS
• Negotiate lower payment processing rates
• Optimize shipping costs
• Reduce fulfillment expenses

Reduce Refunds

• Improve product descriptions and images
• Set accurate expectations
• Enhance product quality
• Better sizing guides (for apparel)

Best Practices for Margin Analysis

1. Review Margins Weekly

Check the daily P&L breakdown at least weekly. Catching margin drops early lets you act before they become significant.

2. Compare Across Products

Do not just look at overall margins. Product-level analysis often reveals that a few products subsidize many underperformers.

3. Track Trends Over Time

A single snapshot is less useful than a trend. Watch whether margins are improving or declining month over month.

4. Include All Costs

Gross margin alone is misleading. Always look at contribution margin and net margin for the full picture.

5. Keep COGS Updated

Outdated COGS data leads to inaccurate margins. Review and update costs quarterly or whenever supplier pricing changes.

Troubleshooting Margin Issues

Margins show as N/A

Cause: COGS not configured for those products. Solution: Add COGS data at Dashboard > P&L > COGS. See the COGS Management guide.

Margins seem too high

Possible causes: COGS values too low, not all expenses included, or missing ad spend data. Solution: Verify COGS values, check that ad platforms are connected, and review expense entries.

Margins seem too low

Possible causes: COGS values too high, high refund rate, or ad spend attribution issues. Solution: Audit COGS values against supplier invoices and review refund data.

Frequently Asked Questions

What is the difference between gross margin and net margin?

Gross margin only deducts COGS from revenue. Net margin deducts all costs including COGS, ad spend, payment fees, shipping, fulfillment, operating expenses, and refunds. Net margin shows your true bottom-line profitability.

Why are my MerchantFlow margins different from my accounting software?

Differences typically arise from the timing of expense recognition, how refunds are handled, or which costs are included. MerchantFlow calculates margins in real time based on synced data, while accounting software may use accrual-based methods.

Can I see margin trends over time in MerchantFlow?

Yes. The Daily P&L Breakdown shows day-by-day margin data, and the profit dashboard displays trend charts for gross and net margins over configurable time periods.

What margin should I target for my e-commerce business?

Target margins depend on your industry. Fashion and beauty brands typically achieve 40-60% gross margins, while electronics are lower at 10-20%. Net margins of 10-20% are considered healthy for most e-commerce businesses.

Related Topics

• P&L Overview - Complete P&L tracking guide
• COGS Management - Set up product costs
• Ad Spend Tracking - Track advertising costs
• Orders - Order-level profitability
• Burn Rate & Runway - Cash flow analysis
• Expense Tracking - Track business expenses

Last updated: March 14, 2026