Track Gross Margin for Your Ecommerce Business

by Craig Anthony

1 min read

Gross margin, which is a company’s profit before operating expenses, is a standard line item on any business’s income statement. This metric is equal to the total revenue minus the cost of goods sold (COGS). Gross margin is an important accounting measure for any business since it reflects the general levels of profitability before accounting for other costs. It is a significant indicator of whether a product, service, or company is likely to be financially successful. Businesses with higher gross margins typically have competitive edges over other businesses in their market. In every case, a higher gross margin is preferable to a lower gross margin.Gross margin is a very important metric for e-commerce businesses to track. Most e-commerce businesses are highly scalable, so operating costs don’t vary significantly as the company grows. As a result, keeping gross margin at appropriate levels can have significant impact on line items farther down the income statement, especially net profit. Since a massive physical presence isn’t needed to run an e-commerce business, with overall operating expenses typically much lower than those of a brick-and-mortar company, revenues and COGS drive most of the business outcomes. An e-commerce business should see gross margins below 20 or 30% as a sign that something dangerous is occurring within the business. Prices may be too low and/or the COGS may be too high. If this occurs, adjust operations and pricing until gross margins approach a number higher than 30%.

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