The formula
Net profit margin is the share of each sale you keep after every cost and fee.
Net profit = revenue − all costs
Profit margin = net profit ÷ revenue × 100
For an online store, revenue is everything the buyer pays you for the order, including the shipping you charge. Platform fees are charged on that full amount, so it's the right base for your margin too.
A worked example
A buyer pays $35 for an item plus $5 shipping, so revenue is $40. Your costs are $9 for the item, $4.50 for the label, $1.20 for packaging, $2 in ads and $4.25 in Etsy fees, a total of $20.95.
Net profit is $40 − $20.95 = $19.05. Profit margin is $19.05 ÷ $40 × 100 = 47.6%.
Gross margin vs net margin
Gross margin only subtracts the cost of the product itself. In the example, that's ($40 − $9) ÷ $40 = 77.5%. It's useful for comparing products, but it makes a store look far more profitable than it is.
Net margin subtracts everything: shipping, packaging, ads and fees. It answers the question you actually care about, which is how much money stays with you. When people talk about profit margin for a small shop, net margin is usually the number to use.
Margin vs markup
Markup is profit as a share of cost. Margin is profit as a share of the price. They describe the same sale but give different numbers, and mixing them up is a common reason sellers underprice.
| Markup on cost | Equals this margin |
|---|---|
| 25% | 20% |
| 50% | 33.3% |
| 100% (double the cost) | 50% |
| 150% | 60% |
| 200% (triple the cost) | 66.7% |
To convert, use margin = markup ÷ (1 + markup). A 100% markup is 1 ÷ 2 = 50% margin. And note that these are before fees and other costs. Doubling your product cost can still leave a thin net margin once shipping, ads and fees are paid.
What's a good margin?
It depends on what you sell and how much of your own time goes in. As a rough guide for small online shops, we treat anything under 15% as thin, 15–30% as healthy and 30% or more as strong. The calculator uses the same bands.
Cheap items need higher percentage margins than expensive ones, because a few dollars of profit disappears quickly with one refund or one lost parcel. And if you haven't counted your time as a cost, your margin needs to be high enough to pay you.
Profit per hour
If you make your products yourself, margin alone can mislead you. A product with a 50% margin that takes two hours may pay you less than one with a 25% margin that takes ten minutes. Divide the net profit by the time one item takes, including packing, to compare them fairly.
For example, $19.05 of profit on an item that takes 45 minutes is about $25 an hour. $7 of profit on an item that takes 10 minutes is $42 an hour, even though the margin percentage may be lower.
How to raise your margin
- Raise prices in small steps. A 5–10% increase often has little effect on sales but goes straight to profit.
- Sell in sets. One label, one package and one set of fixed fees spread across several items.
- Cut ads that don't pay. Check the cost per sale of each campaign and stop the ones that cost more than the profit they bring.
- Buy materials and packaging in bulk once a product sells steadily.
Costs that often get missed
- Fees on shipping. Etsy and card processors charge their percentage on shipping too.
- The real label cost. Use your average label over the last month, not your cheapest one.
- Advertising. Divide total ad spend by the sales it produced and count it on every sale.
- Refunds and damage. Set aside a small percentage for replacements and refunds. Some fees aren't returned when you refund.
- Currency conversion. If you're paid in a different currency, conversion fees reduce what reaches your bank.
- Monthly subscriptions. Shopify plans, apps and tools, divided by your monthly orders.
The calculator works out net profit and margin for you, with every cost and fee listed.
Calculate your profit margin