When business owners talk about success, revenue often steals the spotlight. But what experienced entrepreneurs know is that profit margins tell the real story. For those who are running a thriving ecommerce store with no intent to sell or those considering an exit, understanding margins is the key to knowing exactly where the business stands and where it could go.

In this guide, we provide: 

• An overview of profit margins
• Reasons to calculate profit margins
• Calculation methods
• The qualities of a “good” profit margin
• Ways to improve profit margins

Related Article: Ecommerce Valuation Multiples: What You Need to Know

Understanding Profit Margins

Profit margins are a business’s efficiency report card. They show how much of each dollar you keep after all the bills are paid. Pretty straightforward, right? But here’s where it gets interesting.

Let’s imagine an ecommerce business making $1 million in revenue. That may be impressive at first glance, but the margins tell a slightly different story. After digging into the numbers, we discover they are running on razor-thin 3% margins. Meanwhile, a smaller competitor making half the revenue is keeping 15% of every sale. Guess which business commands a higher multiple when it comes time to sell?

Different types of margins tell different parts of your story.

• Gross profit margin shows how efficiently you produce and sell. High margins here often mean you have pricing power or you run a tight ship in production.
• Operating profit margin reveals how well you manage day-to-day costs like salaries and rent. This number tells potential buyers a lot about how you’re really running things.
• Net profit margin? That’s the bottom line: what you actually keep after everything’s paid. This number can make or break investor interest.

Why Calculate Your Profit Margins?

Financial health check

Revenue might make headlines, but margins determine survival. We’ve seen businesses with impressive top-line growth crash because they never got a handle on their margins. Understanding your margins helps you:

• Know if your prices make sense
• Spot unsustainable costs before they become problems
• Build enough cushion to weather market changes
• Make smart decisions about scaling

Better business decisions

Good margins help you decide:

• Which products deserve more attention
• When to adjust pricing
• Where to cut costs
• How to allocate resources

Competitive edge

Every industry has its own margin expectations. Retail businesses might thrive on 2%–3% net margins, while software companies often see 20%–30% or even more. Understanding where you stand helps you spot opportunities your competitors might miss.

Growth planning

Strong margins create options. They give you:

• Room to experiment with new products
• Resources for expansion
• Confidence in your cash flow
• Clear budgeting priorities

Buyer appeal

For business owners thinking about exit strategies, healthy margins are golden. They show potential buyers current profits as well as future potential. For example, a content business with 60% margins will attract serious buyer interest even if it’s smaller than some competitors.

How to Calculate Profit Margins

Let’s break this down into simple terms. You don’t need an accounting degree to understand margins, but you do need to know the basics.

Gross profit margin: how much you keep from each sale after direct costs.

Formula: ((Revenue − COGS*) ÷ Revenue) × 100

 

Real example:

You sell $100,000 worth of products

Your inventory costs $55,000

((100,000 − 55,000) ÷ 100,000) × 100 = 45% gross margin

 

*COGS = cost of goods sold

Operating profit margin: Factors in running costs like salaries and rent.

Formula: ((Revenue − COGS − Operating Expenses) ÷ Revenue) × 100

 

Real example:

Same $100,000 in sales

$55,000 in inventory costs

$20,000 in operating expenses

((100,000 − 55,000 − 20,000) ÷ 100,000) × 100 = 25% operating margin

Net profit margin: The final number after everything’s paid.

Formula: ((Revenue − All Expenses) ÷ Revenue) × 100

 

Real example:

$100,000 in sales

$85,000 in total expenses

((100,000 − 85,000) ÷ 100,000) × 100 = 15% net margin

What Is an Example of a Good Profit Margin?

What’s a good profit margin? Well, it depends on your business model and industry. We work with successful companies across the spectrum:

• Retail businesses often run on 2%–10% net margins. 
• Software companies typically see net margins of 20%–30%, while SaaS businesses can see much higher, around 70%–80%.
• Service businesses average 15%–25% net margins.
• Content businesses can exceed 50% net margins.

When your margins are high, you have room to experiment. If you make a mistake or need to invest in growth, it’s not the end of the world.

How to Improve Profit Margins

To boost your margins, focus on these strategies:

Smart pricing

• Know your market position
• Test different price points
• Consider premium offerings
• Don’t compete solely on price

Cost management

• Negotiate with suppliers
• Streamline operations
• Cut waste
• Automate where it makes sense

Product mix

• Focus on high-margin items
• Phase out underperformers
• Try strategic bundling
• Develop complementary offerings

Operational efficiency

• Improve key processes
• Invest in better tools
• Train staff effectively
• Eliminate redundancies

Remember the Four Pillars

Strong margins are one piece of the puzzle. Your business value depends on what we like to call the Four Pillars of Value:

1. Growth trends
2. Risk factors
3. Documentation quality
4. Transferability

A business with moderate margins but strength in these areas might be worth more than one with high margins but significant risks.

Partner with Quiet Light

Understanding and improving your profit margins involves numbers and quite a bit more. Ultimately, it’s about building a stronger, more valuable business. If you’re planning for growth or preparing for an exit, getting a handle on your margins will certainly help.

Need help understanding your business’s true value? Our team of experienced Advisors specializes in valuing online businesses of all types. We’ll help you understand where you stand and where you could be. Contact us today for a free valuation.