Net Profit Margin
Net profit divided by total revenue, as a percentage. Net Profit Margin = net profit / revenue × 100. Includes every expense: COGS, marketing, rent, salaries, taxes. The truest measure of profitability.
In practice
Net profit margin is the real 'bottom line.' A store with $280,000 revenue and a 5% net margin = $14,000 annual profit. A store with $140,000 revenue and a 15% net margin = $21,000 profit. Bigger doesn't mean more profitable. Margin matters more than size.
Common misconception
'A good gross margin means a good net margin.' No. A 60% gross margin with 40% marketing spend, 12% salaries, and 8% rent = 0% net margin. A loss. Many eCommerce stores miss this because they look at gross and ignore the rest of the expenses.
How to fix it
Negative net margin? (1) Build a simple P&L: revenue - COGS - marketing - salaries - rent - platform fees - other = net profit, (2) Identify the biggest category, (3) Check whether marketing ROI justifies the spend, (4) Fixed costs — can they be trimmed in year one?
Example
Apparel store: revenue $220K, gross margin 48% = $106K. Marketing $55K, salaries $33K, platform+fees $12K, other $8K = expenses $108K. Net margin: -$2K. Gross looked great — net showed a loss. Fix: cut marketing to $44K + streamline salaries.
Priority
Calculate net profit margin monthly. Don't run a business by bank balance alone — build a simple P&L. Tools: QuickBooks, Xero, or Excel. If net margin is under 5%, there's work to do.
Related terms
Keep learning. Metrics that touch the same area:
- Gross MarginFinance(Sale price - COGS) / sale price × 100. The basis for every pricing and advertising decision.
- Contribution MarginFinanceGross profit minus marketing, payment processing, and variable shipping costs. Contribution Margin = Net Revenue - COGS - Variable Costs. Reflects the real profit each order 'contributes' toward covering fixed costs.
- ROI – Return on InvestmentFinanceA general profitability metric: (net profit / investment cost) × 100. Different from ROAS — it includes all expenses.
- AOV – Average Order ValueFinanceTotal revenue divided by number of orders. The biggest lever for increasing revenue without more advertising.
- LTV / CLV – Customer Lifetime ValueFinanceTotal expected profit from a customer over the entire relationship. A healthy LTV:CAC ratio is 3:1.
- COGS – Cost of Goods SoldFinanceThe direct cost of producing or acquiring products sold. Includes: product + import shipping + customs + packaging.
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