Selling your products in your eCommerce store is good, but it’s also important to understand your gross margin with each product sold. Through our guide, you’ll better understand gross margins and how they can help your eCommerce Store.
Definition of Terms:
Gross Margin
Calculating gross margins would be the amount of profit you get from a sold product after subtracting all the expenses related to it. Your eCommerce store’s profitability will depend on how high or low your gross margin is.
You can get your gross margin by taking the total amount of your revenue and subtracting it from the Cost of Goods Sold (COGS). The exact quantity that you get from this calculation is your gross margin. However, when it comes to bookkeeping for eCommerce businesses, they usually get the gross margin rate.
Your gross margin rate is the same figure shown as a percentage. The calculation to get your gross margin rate would be to divide your gross margin by your revenue and multiply it by a hundred.
Calculations:
Gross Margin = Revenue - Cost of Goods
Gross Margin Rate = (Gross Margin ÷ Revenue) x 100
Revenue
Your revenue is what many would usually call a sale and is also what generates income. The overall price you’re offering your product for is what you call the revenue price, and calculating for it means getting the average sales price and multiplying it by the number of units sold.
Cost of Goods Sold
Unlike revenue, the COGS is the exact amount it takes to produce one unit of the product you’re selling. It includes the materials used, manual labour, shipping costs, and more.
The accountant for your eCommerce store will need your COGS to help determine your gross margin and overall gross income.
Customer Acquisition
Customer acquisition is a marketing strategy that involves acquiring new customers into your eCommerce store. Though it is not directly related to the calculations of your gross margin, it is essential in increasing your gross margin.
How Gross Margins Affect Your ECommerce Store
Now that you’ve understood the basic definition of terms related to gross margins and have done the necessary calculations to get the gross margin of your eCommerce store, it’s time to recognise how these figures affect your business.
Finding your gross margin essentially helps in determining the profitability and sustainability of your store. The higher the gross margins, the more funds you have to invest in tools to increase customer acquisition. If you have lower gross margins against your competitors, it will be more difficult for you to spend on necessary marketing strategies to get more sales.
Ways to Increase Your Store’s Gross Margin
There are two greatly known ways to increase your eCommerce store’s gross margin: boost your revenue or lower your COGS.
Increasing your revenue can mean improving your product quality and marketing it as a premium item. It can also refer to giving the packaging a rebrand to let your customers see it with a higher value. Lastly, it could mean finding a different angle when marketing your product, such as showcasing the story, advocacy, customer value, and more.
On the other hand, lowering your COGS might mean a pinch lower in quality and shipping but greater sellability. Either solution is a tricky strategy, but it’s essential to figure out what will work best for your business.
Final Thoughts
Gross margins allow you to see your profitability against your competitors. Letting your eCommerce accountant keep track of it will ultimately help you learn how to make future improvements to your online store.
Consider booking an appointment with eCommerce bookkeepers in Australia if you’re struggling with your numbers. The ECommerce Accountant provides exceptional business advice for online stores and influencers. Contact us today to know more about our services!