For aspiring entrepreneurs and marketers in the e-commerce industry—particularly in fashion, consumer packaged goods (CPG), and beauty—understanding profit metrics is crucial. It forces founders and revenue leaders to understand their sales as well as the cost of servicing those sales. Let's look at the core profitability metrics you should track for your business.

Profitability metrics allow you to assess not only your sales figures but also your ability to manage costs and generate profits. For instance, while gross profit margin sheds light on the costs directly associated with your products, net profit margin encompasses all business expenses including operating expenses and fixed expenses, providing a comprehensive financial overview on business profitability.

The challenge lies in determining which metrics are most relevant to your specific business and industry, especially for those new to e-commerce. Whether you are in the fashion, beauty, or consumer packaged goods (CPG) sector, familiarizing yourself with metrics such as gross profit margin is essential. These metrics provide a clear picture of your earnings and expenses, enabling you to the financial health of your business, assess your profitability, and identify areas for improvement.

Which profitability metric should you track?

For new e-commerce entrepreneurs, especially in fashion, beauty, and CPG, it's important to know these profit metrics:

Gross Profit Margin: This metric measures how much profit you generate from product sales after paying for the costs of making them (typically called Cost of Goods Sold). For example, if you sell a dress for $100 and it costs $60 to make, your gross profit margin is 40%.

There can be fluctuations in gross profit margin even though there is an increase in sales your company generates. One possible reason could be changes in the cost of goods sold (COGS). Changes can either be in the form of a decrease in COGS due to a temporary reduction in raw material prices or better deals with suppliers. It can also be in the form of an increase in COGS due to a shortage of raw materials or an unexpected rise in production costs such as labor expenses or energy prices. Businesses should always try to maintain stable gross profit margins across quarters. This means determining optimal pricing and reviewing production costs.

Contribution Margin (CM1, CM2, CM3): These give a detailed look at profitability. They are expressed as a percentage of total sales.

• CM1: Sales value minus the cost of making the product (COGS). This is commonly also called Gross Margin. This is useful for determining if your products are adequately priced given their cost of production.

• CM2: CM1 minus the directly attributable variable costs of sales e.g. logistics, warehousing, and payment gateway fees. This is used to determine if you are charging enough in fulfillment/shipping or if there is a need to explore cheaper alternatives in warehousing, shipping, payment platforms, etc.

• CM3: CM2 minus offline and online marketing costs (but not marketing salaries). This is used to determine if your marketing efforts are converting enough customers.

  

Net Profit Margin: This shows how much of your total income is actual profit, after all expenses. This includes costs like salaries, rent, and other fixed costs. So, if your store earns $100,000 and your total costs are $80,000, your net profit margin is 20%. Monitoring the net profit margin over time allows businesses to assess their financial performance and make informed decisions. A consistent or increasing net profit margin indicates that the company is growing and becoming more profitable.

Understanding these financial metrics also helps you see how well your store is doing financially, measures profitability, and guides your business decisions. Note that the terms used around the world might differ, so make sure you clarify which profit margin is being referred to. For instance, Shopify doesn’t differentiate between Contribution Margins 1, 2, and 3 in this article.