Your Complete Guide to Profit Margins for Retail Businesses

Posted 3 years ago by Max Komonov

Profit margin is one of those business-y sounding words that seems a lot more complicated than it really is.

Essentially, a business’s gross profit margin is a measurement of how much money a company is making. For example, if it takes $1 to make a product and you sell it for $2, you’ve got a 50% profit margin.

That’s the basic idea, but let’s be honest: in practice, it’s a little more complicated than that. And there are some factors that influence profit margins that are important to think about. Plus, what is a good profit margin for retail?

We’ve got you covered.

What Should You Know About Profit Margins?

So we already know that gross profit margin can be calculated by accounting for the cost of production and the final sale price. But what’s the actual gross profit margin formula?

Ok, get ready for some math (stick with us here).

How do you calculate gross profit margin?

First, subtract the cost of goods sold (COGS) from the net sales. Next, divide the resulting number by the net sales to calculate gross profit margin as a decimal. Convert the decimal to a percentage to find gross profit margin. Here’s an example:

A business makes $5,000,000 by selling phone cases.
While making the phone cases, the company creates $2,000,000 in labor and material costs.
To calculate her company’s gross profit margin, the CEO subtracts the COGS from net sales ($5,000,000 minus $2,000,000 = $3,000,000).
Next, she divides that resulting number by her company’s revenue to get a decimal ($3,000,000 divided by $5,000,000 = 0.6).
After converting the decimal into a percentage, she finds that production costs consume 40% of sales, resulting in a 60% gross profit margin.

Why does Gross profit margin matter?

Gross profit margins are an indicator of your retail business’s health. Understandably, if the margin is too low, you won’t make enough money.

What is Net profit margin?

If you’re learning about gross profit margins, you’ll probably come across net margins. So what is a business’s net margin? Think of it like this: Gross profit margin is how much money is left over after subtracting the cost of goods sold, while net profit margin is how much money is left over after accounting for things like operating expenses, debt, and taxes — as well as the COGS.

What Is a Good Profit Margin for Retail?

Profit margins vary from industry to industry — by a lot.

According to data analyzed in January 2021, the advertising industry typically sees gross profit margins of about 24%. Meanwhile, the pharmaceutical industry enjoys margins slightly over 70%. And that wide range doesn’t stop with commercials and drugs.

Gross profit margins by industry

Education: 41.15%
General Electronics: 26.53%
Food Wholesalers: 15.49%
Online Retail: 42.53%

So profit margins vary, but what is a good profit margin for retail? While there isn’t a specific number to aim for, you can get a better idea of good profit margins for retail by looking at averages in specific retail industries.

Women’s clothing: 46.5%
Shoes: 42.6%
Supermarkets and Grocery Stores: 28.8%
Pet Supplies: 43.6%

So yes, like a lot of things in business, there isn’t a one-size-fits-all answer to what is a good profit margin for retail? But ultimately, you really can’t have a gross profit margin that’s too high as long as your business is gaining that capital sustainably. So how do you make sure your profit margin is healthy?

How To Ensure a Good Profit Margin for Retail

What is a good profit margin for retail? It depends on the industry, but the steps to ensuring your business has healthy margins will generally look similar no matter the number you’re aiming for.

To learn about these margin-maximizing strategies, let’s look at what influences profit margins so we know what parts of the business we’re dealing with.

What influences profit margins for retail businesses?

Number one: Operating costs

Operating costs (including things like paying employees, purchasing shipping materials, and savings funds for marketing campaigns) have to be subtracted from your revenue when you calculate your retail business’s net profit margin. If operating costs are too high, the business might not make enough money to function.

Number two: Marketing practices

Poor marketing practices will depend on the business, but if your company is pursuing ads that don’t make the sale or flyers that aren’t connecting with shoppers, your operating costs will go up and your net profit margin will go down.

Number three: Pricing

This one may seem obvious, but pricing really is a big factor in both gross and net profit margins. But don’t just think about prices that are too low. If your company prices its products too high, you might lose potential customers. Sometimes, a low price, high volume business model is best.

How do you create a good profit margin for retail?

You can make sure your business’s profit margins are healthy by looking at wasteful practices associated with the three margin-influencers listed above.

First, think about what costs your business money in general and make changes to minimize loss. Be on the lookout for unused or inefficient services, like old accounting software, and find more cost-efficient alternatives.
Next, develop a more advanced marketing strategy that prioritizes impactful mediums, such as digital ads. (Ecwid can help if you don’t know where to start.)
Finally, avoid missing your ideal pricing target by accounting for factors like the market average, manufacturer recommendations, and customer psychology. Ultimately, prices need to reflect what the shopper is willing to pay.

Profit Margins and Ecommerce

If you’re ready to improve your retail business’s profit margins, expanding into ecommerce might be the right move. Data shows that online retail stores have some of the highest gross and net margins in the retail market — with ecommerce retail enjoying gross margins more than 18% higher than the general market.

About The Author

Max has been working in the ecommerce industry for the last six years helping brands to establish and level-up content marketing and SEO. Despite that, he has experience with entrepreneurship. He is a fiction writer in his free time.