Profit Margins - Gross, Contribution & Net

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?

Every margin in MerchantFlow divides by net revenue (gross revenue minus refunds), never gross revenue. A margin reads 0% when net revenue is zero or negative.

Product Margin (CM1)

The percentage of net revenue remaining after the product cost alone - excluding per-unit handling:

CM1 = Net Revenue - Product Cost
CM1 Margin = CM1 / Net Revenue

What it tells you: the cleanest read on sourcing efficiency, unaffected by handling or freight loaded onto the cost entry.

Gross Margin (CM2)

The percentage of net revenue remaining after subtracting the full cost of goods sold, which includes per-unit handling:

Gross Margin = (Net Revenue - COGS) / Net Revenue

Example:

• Net 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 (CM3)

The percentage of net revenue remaining after subtracting all variable order-level costs:

Contribution Margin = Gross Profit - Shipping Cost - Fulfillment - Payment Fees - Ad Spend
Contribution Margin % = Contribution Margin / Net Revenue

Example:

• Net Revenue: $50,000
• COGS: $20,000 -> Gross Profit $30,000
• Fulfillment: $2,000
• Payment Fees: $1,500
• Ad Spend: $5,000
• Contribution Margin: $30,000 - $8,500 = $21,500 -> 43%

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

EBITDA

EBITDA = Contribution Margin - Operating Expenses - Amortised CapEx - Variable Costs

Net Margin

Net Profit = EBITDA - Financing Cost
Net Margin = Net Profit / Net Revenue

Net margin absorbs everything above plus operating expenses, amortised CapEx, other variable costs, and any interest on funding agreements.

Sales tax and refunds are the two things it does not subtract at this line. Refunds were already netted out to reach net revenue, and sales tax is treated as a pass-through liability unless you pick "Yes - deduct from profit" on the Sales Tax Treatment card in Settings > Financial Preferences - in which case a Sales Tax (treated as cost) line is deducted just before net profit. The default is "No - pass-through".

Example:

• Net Revenue: $50,000
• All deducted costs: $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

Profit > Summary

Navigate to Profit > Summary to see the full waterfall for the selected timeframe. Each line shows its amount and its percentage of net revenue, so gross, contribution, EBITDA and net margins all read off the same card.

Product Details Pages

View individual product profitability:

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

Daily P&L Breakdown

For granular analysis, navigate to Profit > Daily Breakdown for a day-by-day P&L. The table columns are:

Date, Revenue, COGS, Gross Profit, Ad Spend, Fees, Tax, Funding, Net Profit, Net %.

Expanding a row reveals the detail behind it - refunds, discounts, COGS coverage, and the individual cost lines. You can also filter by a minimum COGS coverage percentage to isolate days where cost data is thin.

Export: the page exports a CSV containing Date, Gross Revenue, Refund Amount, Discount Amount, Shipping Revenue, Net Revenue, COGS, Gross Profit, Gross Profit Margin %, Ad Spend, Payment Fees, Tax Amount, Funding Repayment, Contribution Margin, Contribution Margin %, Net Profit, Net Profit %, COGS Coverage %, Currency.

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 Profit > 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 Profit > 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 net revenue. Net margin additionally deducts fulfillment, payment fees, ad spend, operating expenses, amortised CapEx, other variable costs, and funding interest. Refunds are not deducted at either line - they are already netted out to produce net revenue. 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 for any timeframe, and the main dashboard tracks profit and margin over the selected period with period-over-period comparison.

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: August 29, 2026