Gross Margin
Gross margin is revenue minus cost of goods sold, divided by revenue — the first-line profitability check that decides how much room you have to spend on acquisition, operations, and returns.
Gross Margin
Revenue minus cost of goods sold, divided by revenue — the share of each sale left after product costs.
Gross margin is the percentage of revenue that remains after subtracting the direct cost of producing or sourcing the goods you sold. It is the first-line profitability indicator on the P&L and the ceiling against which every downstream cost — paid acquisition, fulfilment, returns, payroll — has to fit.
For an online store, gross margin under roughly 50% leaves very little oxygen for the marketing spend, 3PL fees, and return rates the model demands. Most healthy DTC brands target 60-75% on apparel and beauty, and treat the figure as a strategic constraint, not an accounting output.
Gross margin sits at the top of the e-commerce metrics stack because every other unit-economics calculation depends on it. Contribution margin, payback period, and the maximum CAC you can sustainably pay are all derived from this one number.
The mistake most operators make is treating it as a static reporting line. In reality it moves every week — with promo discounts, freight surcharges, SKU mix, and supplier price changes — and the brands that monitor it weekly catch margin erosion months before it shows up in the bank account.
Gross Margin % = (Revenue - COGS) / Revenue × 100
Revenue
Net revenue
Gross sales minus discounts, refunds, and returns. Use net, not gross — discounting silently eats margin.
COGS
Cost of goods sold
Landed product cost: unit cost from supplier plus inbound freight, duties, and any per-unit packaging. Excludes marketing and fulfilment.
A Shopify apparel brand sells a €80 hoodie. Landed cost (factory + inbound freight + duty + polybag) is €22. They run a 15% promo, so net revenue per unit is €68.
Net revenue per unit: €68
COGS per unit: €22
→ Gross margin = (68 - 22) / 68 = 67.6%
67.6% is healthy for apparel and leaves room for paid acquisition at a 25-30% CAC ratio while still funding fulfilment and a 5% return rate. If the promo deepened to 30%, net revenue would drop to €56 and margin would compress to 60.7% — still workable, but the next discount cycle would start eating into operating profit.
Benchmarks vary sharply by vertical because COGS structures are not comparable. Beauty and supplements ride on high markups over low-cost formulations, while consumer electronics and food carry thin margins offset by higher order frequency or basket size.
Typical gross margin ranges by e-commerce vertical
| Vertical | Healthy range | Warning zone | Notes |
|---|---|---|---|
| Beauty & skincare | 70-80% | < 65% | High formulation markup; watch sample/GWP cost creep |
| Apparel | 55-70% | < 50% | Promo cadence and return rate compress reported margin |
| Supplements | 65-75% | < 60% | Subscription mix lifts blended margin over time |
| Home & decor | 50-65% | < 45% | Freight and oversize fees eat the spread |
| Consumer electronics | 25-40% | < 20% | Thin margins; profit comes from attach + accessories |
| Food & beverage (DTC) | 35-50% | < 30% | Cold-chain and short shelf life weigh on COGS |
When your margin sits in the warning zone, the problem is rarely one big leak — it is usually three small ones compounding: a freight rate that crept up, a hero SKU sold too often at promo, and a return rate creeping past 10%. Reviewing margin by SKU and by channel monthly catches all three before they merge into a quarter-end surprise.
Gross margin FAQs
For most online retail brands, 60-70% is the healthy band. Beauty and supplements skew higher (70-80%); apparel sits in the middle (55-70%); electronics and food run thinner (25-50%). Below 50% the business model has to compensate with very high repeat purchase or very low CAC.
Gross margin only subtracts product cost (COGS). Contribution margin goes further and also subtracts variable costs per order — payment processing, pick-pack-ship, return handling, sometimes paid acquisition. Contribution margin is the more honest number for deciding whether a SKU or channel is actually profitable.
Inbound freight from your supplier — yes, it's part of landed cost and belongs in COGS. Outbound shipping to the customer — no, that sits below the gross-margin line in fulfilment costs. Mixing the two inflates COGS and makes vertical benchmarking impossible.
It sets the ceiling. If your gross margin is 60% on a €50 AOV, you have €30 per order to cover fulfilment, returns, overhead, and acquisition combined. A typical rule is that CAC shouldn't exceed 25-35% of gross margin per first order — anything higher and you're banking entirely on repeat purchase to make the customer profitable.
Usually one of four causes: promo depth increased (more discounting), product mix shifted toward lower-margin SKUs, supplier or freight costs rose silently, or return rates climbed. Cut the report by SKU, by channel, and by week to isolate which lever moved.
No. Markup is calculated on cost; margin is calculated on revenue. A product that costs €20 and sells for €50 has a 150% markup but a 60% gross margin. Investors and finance teams speak in margin; merchandising teams often speak in markup — make sure the room agrees on which.
Weekly at the channel and category level, monthly at the SKU level. Daily if you're running heavy promotions. The number moves faster than most operators realise, and waiting for the monthly close is how margin erosion becomes a quarterly surprise.
Yes, indirectly. The per-order margin on a subscription unit is usually similar to a one-off, but subscription customers cost less to re-acquire (lower blended CAC) and discount less, so the blended margin across the customer lifetime is meaningfully higher.
Returns hit the revenue side — net revenue is gross minus refunds. The returned unit's COGS is also reversed if it goes back into sellable stock, but restocking labour, return shipping, and write-offs on damaged returns all compress the effective margin. A 15% return rate can drag reported margin down 3-5 percentage points.
It's the upstream input. AOV, conversion rate, and traffic determine revenue; gross margin determines how much of that revenue you actually keep before operating costs. Pair it with CAC, LTV, and contribution margin for a full unit-economics picture.
Track CAC, channels, and funnel conversion in one place
Metricuno connects ad spend, funnel events, and revenue so you can see CAC by channel, cohort, and campaign — without stitching together five tools.