Gross Margin
Gross margin is the share of revenue left after cost of goods sold — the ceiling on everything else your store can spend. Here's the formula, the benchmarks, and the line where DTC economics break.
Gross Margin
Revenue minus cost of goods sold, divided by revenue — the share of each sale left to cover everything else.
Gross margin is the first-line profitability indicator on a P&L. It measures what percentage of revenue survives after the direct cost of producing or sourcing the goods you sold — landed product cost, manufacturing, inbound freight, and packaging.
Everything else the business spends — marketing, fulfilment, returns, payroll, software, rent — has to come out of gross margin. For online stores, gross margin under 50% leaves very little headroom once paid acquisition, 3PL fees, and reverse logistics are stacked on top. It's the single number that decides whether the rest of your unit economics can work at all.
Gross margin is calculated per order, per SKU, per channel, or across the whole business — and each cut tells you something different. Blended gross margin is what investors look at; SKU-level gross margin is what tells you which products you should actually be promoting.
The trap is treating COGS as just the invoice from your supplier. A truthful gross margin includes inbound freight, duties, customs, payment processing, and a returns allowance. Strip those out and you'll over-state margin by 5-15 points, which is exactly the gap that hides an unprofitable business.
Gross Margin % = ((Revenue − COGS) / Revenue) × 100
Revenue
Net revenue
Gross sales minus discounts and returns. Use net, not gross — otherwise refunds inflate the top line.
COGS
Cost of goods sold
Landed product cost: supplier invoice + inbound freight + duties + packaging + payment processing. Excludes marketing, fulfilment labour, and overhead.
A Shopify apparel brand sells a €80 hoodie. Landed cost is €22, packaging €2, payment processing at 2% is €1.60, and the historical returns rate is 8% (so add €1.76 of refund/restocking cost per order).
Net revenue per order: €80.00
Landed product cost: €22.00
Packaging: €2.00
Payment processing (2%): €1.60
Returns allowance (8%): €1.76
Total COGS: €27.36
→ Gross margin = (80 − 27.36) / 80 = 65.8%
A 65.8% gross margin is healthy for apparel and leaves roughly €52.64 per order to cover paid acquisition, 3PL pick-and-pack, customer service, and overhead before any profit. If blended CAC sits above €40, the business is breaking even at best.
Benchmarks vary sharply by category. Beauty and supplements clear 70%+ comfortably; apparel sits in the 55-70% band; consumer electronics and food often struggle to hold 40%. The number is only meaningful against the right peer set — comparing a skincare brand to a coffee subscription is noise.
Typical gross margin ranges for online stores by vertical
| Vertical | Healthy gross margin | Warning zone | Notes |
|---|---|---|---|
| Beauty & skincare | 70-80% | <65% | High markup category; private-label formulations push margins higher than reseller models. |
| Apparel & accessories | 55-70% | <50% | Returns rates of 20-30% eat heavily into reported margin if not booked into COGS. |
| Supplements & wellness | 65-75% | <60% | Subscription economics tolerate slightly lower margin if retention is strong. |
| Home & lifestyle | 50-65% | <45% | Heavy/bulky SKUs absorb more inbound freight; watch landed cost carefully. |
| Consumer electronics | 25-40% | <25% | Thin margins; only viable with high AOV or strong attach-rate accessories. |
| Food & beverage | 35-50% | <35% | Cold-chain and short shelf life add hidden COGS most brands miss. |
| Jewellery (fashion) | 60-75% | <55% | Material cost volatility matters more than for synthetic categories. |
Gross margin is the ceiling on every other ecommerce metric. If yours is 45%, your contribution margin can never exceed 45 cents per euro — and after a €15-25 CAC and €6-9 in fulfilment, there's nothing left. Improving gross margin by 5 points usually does more for the bottom line than a 10% lift in conversion rate.
Gross margin FAQ
Gross profit is the absolute euro amount (Revenue − COGS); gross margin is that amount expressed as a percentage of revenue. Gross profit tells you the size of the prize; gross margin tells you the efficiency.
For most DTC verticals, 60-70% is the healthy zone. Below 50% you'll struggle to fund paid acquisition profitably; above 75% usually only happens in beauty, digital goods, or private-label supplements.
Accounting standards vary, but for ecommerce decision-making the more useful split is to keep COGS as landed product cost only, and report fulfilment, 3PL, and shipping separately as contribution-margin items. That way gross margin stays comparable across SKUs regardless of weight or destination.
Yes — directly. A 20% discount on a 60%-margin product drops gross margin to 50%, not 40%, because the discount comes off revenue while COGS stays fixed. Heavy promotional calendars need careful gross-margin tracking by channel.
Gross margin sits at the top of the ecommerce metrics stack — it caps contribution margin, which caps profitability after CAC. LTV is meaningless without applying gross margin to it; an LTV of €200 at 40% gross margin is really €80 of gross profit to fund acquisition.
Both, in different ways. Refunded orders should reduce net revenue (not gross sales). Restocking costs, return shipping, and write-offs on non-resellable items belong in COGS as a returns allowance — typically 3-10% of revenue depending on category.
Blended gross margin: monthly. SKU-level: every time supplier costs, freight rates, or duties change — which for most brands is at least quarterly. Brands sourcing from Asia in 2024-2025 have seen freight swings of 30-50% that completely changed the margin picture.
Shopify's gross margin only uses the cost-per-item you've entered in product settings. It excludes inbound freight, duties, payment processing, and packaging — so it's typically 5-15 points higher than your true gross margin. Treat the Shopify number as a directional SKU comparison, not a financial truth.
Only with very high AOV, strong repeat rate, or subsidised acquisition (e.g. organic-heavy brands). A 35% gross margin works if AOV is €300+ and CAC is €30, but it does not work at €50 AOV and €25 CAC — the maths simply doesn't close.
No. Marketing, paid ads, influencer fees, and agency retainers all sit below gross margin in operating expenses or contribution margin. Mixing them in is one of the most common reporting mistakes and makes the metric useless for product-level decisions.
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