What Is Product Margin in eCommerce?
Product margin is the profit left after deducting all costs associated with a product. The real measure of a SKU's health.
Key Takeaways
- Product margin = selling price minus all direct costs, divided by selling price
- Include all direct costs: COGS, shipping, returns, marketplace fees, payment fees
- A product with high GMV but negative product margin is destroying value
- Rank SKUs by product margin, not just revenue, to know where profit comes from
What goes into product margin?
Product margin measures what is left after deducting every cost directly attributable to selling one unit: the product cost (COGS), inbound shipping from supplier, outbound shipping to customer, packaging, marketplace fees, payment processing fees (typically 1.5-3%), and a returns provision. What is left is the true per-unit margin.
Why revenue rank misleads
A £50 product selling 500 units a month with 5% margin contributes £1,250. A £20 product selling 300 units with 40% margin contributes £2,400. The lower-revenue product is more than twice as profitable. Revenue rank and margin rank are often very different lists.
Calculating it
Take selling price. Subtract COGS (including inbound freight and duty). Subtract outbound shipping. Subtract marketplace fees. Subtract payment processing. Subtract returns provision (refund rate multiplied by average refund cost). Divide the result by selling price. That percentage is your true product margin.
Margin by channel
The same product can have dramatically different margins across channels. Selling DTC through your own website might yield 45% margin. The same product on Amazon after fees might yield 25%. On a wholesale basis to a retailer, 15%. Understanding margin by channel tells you where to focus your traffic and promotional spend.
Using margin to make decisions
A product margin analysis tells you which SKUs to promote (high margin), which to reprice (low margin but fixable), which to sunset (persistently negative margin), and where to negotiate harder with suppliers (high-volume but low-margin lines). Run your SKU margin report quarterly.