Understanding Profit Margins in E-Commerce
Before we dive into benchmarks, it’s important to understand what profit margins are all about.
There are simply two key types of profit margins:
1. Gross Profit Margin: This shows how much money remains after covering product costs but before expenses like marketing, operations, and taxes.
Gross profit margin = [(Revenue - Cost of Goods Sold) ÷ Revenue] × 100
2. Net Profit Margin: This is the final profit percentage after factoring in all costs, including advertising, software subscriptions, and salaries.
Net profit margin = [(Total Revenue - Total Expenses) ÷ Revenue] × 100
When buying an e-commerce business, we advise you to focus on the net profit margin metric as it reflects the actual take-home earnings of the business.
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Industry Benchmarks: What is Considered a “Good” Profit Margin?
As you may already know, profit margins vary widely depending on the business model and niche.
Below we take a closer look at some common e-commerce models and their typical profit margins:
E-commerce Model | Average Net Profit Margin |
|---|---|
Dropshipping | 10-30% |
Private Label | 25-50% |
Wholesale | 15-30% |
Subscription Box | 40-60% |
Print-on-Demand | 10-20% |
Handmade/Custom Products | 50-70% |
So, what is considered a good profit margin for an e-commerce store?
Generally, a net profit margin of 20-30% is considered healthy for most e-commerce businesses. However, higher margins (above 40%) indicate strong pricing power and efficient operations, while low margins (under 15%) may suggest high costs or intense competition.
NOTE: If you find that the profit margins of a company are below the industry standards, then you should consider digging deeper to uncover what could be the issue.
Potential reasons for this could be the seller’s pricing strategies, cost structure, and marketing effectiveness. Let’s discuss more about these factors in the next section.
Key Factors That Affect Profit Margins in E-Commerce
Now that you know what is considered a “good” profit margin for an e-commerce store on sale, you might be wondering what really affects this crucial metric.
Well, there are several factors behind it. Let’s briefly discuss each of them below:
1. Product Costs & Sourcing
The biggest factor affecting the gross margins of a store is its cost of goods sold (COGS).
Don’t be surprised to find out that high-margin businesses typically source products at low wholesale costs or manufacture them directly.
Case in point, all dropshipping models usually register lower margins due to supplier markups.
Quick Tip: Negotiating bulk pricing with suppliers can help you significantly improve the profitability of your e-commerce store post-acquisition.
2. Pricing Strategy
Pricing is another key factor that directly impacts the profit margins.
A common trend amongst many e-commerce businesses is undervaluing their products in hopes of staying competitive.
Unfortunately, this ends up hurting their margins.
While higher markup percentages can help you create more room for profit, overpricing can hurt conversion rates.
Premium pricing strategies tend to work well if your brand has strong differentiation.
3. Customer Acquisition Costs (CAC) & Marketing Spend
If the store you’re planning to buy relies heavily on paid ads (Facebook, Google, TikTok), the high CAC involved can eat into profits.
On the other hand, a store with a strong organic traffic strategy (SEO, social media, email marketing) can register higher margins.
That said, we advise you to check the return on ad spend (ROAS) and customer lifetime value (LTV). These will help you assess if marketing is efficient.
4. Shipping & Fulfillment Costs
YES, an e-commerce store that’s offering free shipping can benefit from a reduced cart abandonment rate.
But at the same time, it can also cut into profit margins.
Also, owning inventory vs. dropshipping plays a crucial factor in profit margins.
While holding inventory requires capital, it often leads to better per-unit margins.
3PL (third-party logistics) fees can also quickly add up if fulfillment isn’t optimized.
5. Operational Expenses & Overhead
The operational costs of a store can also impact net margins. Common operational costs include:
Software subscriptions (Shopify, email marketing tools, analytics)
Team salaries, and
Warehouse rent
Quick Tip: Is the online store for sale featuring high operational costs and low-profit margins? If yes, you may be able to turn around the profit by simply outsourcing non-core tasks can sometimes reduce costs and improve margins.
How To Evaluate Profit Margins When Buying an E-Commerce Business
Before you invest your hard-earned cash into an e-commerce store, you want to ensure it has profitability.
And one way to do so is by analyzing the profit margins metric.
Here are crucial tips to help you correctly analyze this crucial topic:
Request financial statements from the seller
These include the profit & loss reports, tax returns, etc., and will help you verify the store’s actual net margins.
Red flags to NOTE:
Margins suddenly spike before the business is listed for sale.
Over-reliance on ads—if paid traffic stops, revenue drops.
High return rates or refund requests cut into margins.
When is a Low Profit Margin Acceptable?
Here are key instances when you may consider an online store with low-profit margins:
Some businesses intentionally reinvest profits into growth, temporarily reducing margins.
Amazon FBA and high-volume stores may also display low margins but have large sales volumes.
If you’re confident you can improve pricing or reduce expenses post-acquisition, low margins may be an opportunity rather than a dealbreaker.
How to Improve Profit Margins in E-Commerce
Let’s say you inherit an e-commerce store with not-so-healthy profit margins.
In this case, you can still work the margins up and make them healthier by implementing these proven tricks.
1. Consider increasing revenue without increasing costs
One way you can achieve this is by upselling & cross-selling (e.g., "Frequently bought together" bundles). This can dramatically increase the store’s average order value (AOV).
Besides, you may consider implementing a subscription model (if applicable). This ensures recurring revenue and higher margins.
You should also focus on repeat customers—email marketing and loyalty programs reduce CAC over time.
2. Reduce the store costs & optimize expenses
One way to do so is by revisiting your supplier’s terms. Switching to a more affordable supplier or negotiating better rates can significantly impact margins.
We also suggest cutting unnecessary SaaS subscriptions and reducing inefficient ad spend to lower the operational costs further.
Probably the best thing you can do to reduce overhead is to automate processes. This can involve using chatbots for customer service, implanting fulfillment software, etc.
3. Implement pricing strategies that boost profitability
One such strategy is value-based pricing. This is where you simply set prices based on the perceived value to the customer instead of pricing based on costs.
Psychological pricing tactics can also work! These include simple tricks like odd pricing (e.g., $49 instead of $50) which tend to boost conversions.
You may also want to give dynamic pricing. Here, you adjust prices based on demand, competition, or seasonal trends.
We Help You Buy / Build, Manage and Scale E-commerce Brands for an EXIT
E-commerce Simplified for Busy Individuals – We handle the buying, building, and scaling, so you can focus on what matters.
Growth-Focused Strategies – From sourcing to marketing, we drive growth and prepare you for a profitable exit.
Expertly Managed Exits – We build a high-value brand designed for a Lucrative exit.
Wrapping Up
For most e-commerce stores, a net profit margin of 20-30% is considered a solid benchmark. Higher margins (40%+) indicate strong pricing power and efficient cost management, while lower margins may signal high competition, inefficiencies, or poor financial planning.
If you’re considering buying an e-commerce business, always verify profit margins, look beyond revenue figures, and look for opportunities that can help you improve your profitability post-acquisition.
Buying an e-commerce store? Don't take risks—let our expert team handle the heavy lifting. We conduct in-depth financial due diligence, analyzing profit margins to ensure you're making a smart, high-ROI acquisition.
But we don’t stop there. We’ll also negotiate the best deal for you and provide hands-on post-acquisition support—implementing proven scaling strategies to grow your store’s value by 2-10x. When it’s time to exit, you’ll be in the best position to maximize your profits.
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