Gross margin is the money a sale leaves after the cost of the product itself. It sets how much a store can spend on ads, staff, shipping, and software and still make money.
For an online store, the product is not the only cost of a sale. Returns, shipping, payment fees, and import duties all come out of that margin, and the standard calculation leaves most of them out.
This article covers what gross margin is, what belongs in cost of goods sold, what a healthy number looks like in 2026, and how to improve it
TL;DR
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Gross margin is (revenue minus cost of goods sold) divided by revenue. It measures product economics, before marketing and overhead.
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Most merchants get COGS wrong. Landed cost, duties, and returns all belong in it. Fix that before you compare your margin to anyone's.
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A strong gross margin can still hide a thin net margin.
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For DTC brands, contribution margin is the number that matters. It takes out shipping, fulfillment, and fees per order and tells you whether an order made money.
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Price is the fastest lever. Lower product cost, shift the mix, and cut returns from there.
What gross margin actually measures
Gross margin is the share of revenue left after the cost of the product sold, written as a percentage.
Gross margin = (revenue minus cost of goods sold) / revenue, shown as a percentage.
Two terms get mixed up here. Gross profit is the dollar figure. Gross margin is that same figure as a share of revenue. A store with $500,000 in sales and $200,000 in product cost has $300,000 in gross profit and a 60 percent gross margin.
Everything below that line comes out of the $300,000: ads, salaries, rent, software, and your own pay. Gross margin sets how big that pool is, which is why it caps growth. A brand at 60 percent can spend far more to win a customer than one at 25 percent and still turn a profit. Your gross margin funds acquisition, and acquisition drives customer lifetime value.
Gross margin is the first cut of revenue. Everything else is paid out of what is left
Gross margin vs markup
One more number gets mistaken for margin, and it quietly underprices half of most catalogs. Markup and margin measure the same sale against different numbers. Markup is measured against your cost. Margin is measured against your selling price.
Take a product that costs $20 and sells for $40.
That is a 100 percent markup but a 50 percent gross margin. Set prices at a 50 percent markup thinking you have a 50 percent margin, and you land near 33 percent. Do that across a full catalog and the missing points add up fast.
What counts as cost of goods sold for an online store
Some costs always belong in COGS:
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The unit cost you pay your supplier or manufacturer
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Inbound freight to get stock to your warehouse
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Import duties and tariffs
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Per-unit production, assembly, or kitting
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Inbound handling and inspection
Then there are the costs accountants argue over: outbound shipping to the customer, pick-and-pack or third-party logistics (3PL) fees, and platform payment processing fees.
A store can post a healthy textbook gross margin and still lose money on a big share of orders once those costs land.
Know both figures.
Report gross margin the standard way so you can compare against other brands, and track contribution margin (below) for daily decisions.
Returns get their own line. Refunded revenue and stock that comes back unsellable come straight out of margin, and in apparel that is big enough to define the category.
Tariffs are a live 2026 factor.
They feed straight into COGS through import duties, so a sourcing choice made two years ago can raise your COGS today. Signet Jewelers, in its fiscal 2026 annual report, described holding its gross margin together against pressure from tariffs and higher gold prices. Smaller stores face the same math with none of the scale to absorb it.
What is a good gross margin for eCommerce?
It depends on what you sell. Gross margin clusters by product type, so a beauty brand and a grocery store run very different numbers, and a single blended average hides that.
The January 2026 NYU Stern dataset, built by Professor Aswath Damodaran from company filings, shows where real US public companies land by category. There is no dedicated online-retail row, so these sectors are the closest honest proxy.
|
Category (NYU Stern, Jan 2026) |
Gross margin |
Net margin |
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Apparel |
56.88% |
3.85% |
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Soft beverages |
54.74% |
13.40% |
|
Household products (beauty, personal care) |
51.04% |
11.68% |
|
Total market (all US firms) |
37.76% |
9.74% |
|
Specialty retail |
35.30% |
5.19% |
|
Home furnishings |
30.28% |
1.10% |
|
Grocery and food retail |
26.31% |
1.32% |
These are sector averages from large public firms. A small DTC store in the same category usually nets below the sector line, because acquisition and fulfillment cost more at your scale.
A high gross margin does not mean a healthy business. Three reads from the table make that clear.
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Gross rank is not net rank. Apparel has the highest gross margin here and one of the lowest net margins. Returns, markdowns, marketing, and overhead take the other 53 points. Soft beverages and household products start lower on gross and keep far more of it.
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The 10 percent net figure is the wrong row. That number comes from the total market line, which folds in software and finance. Retail runs four to five points under it, so a store quoting 10 percent is reading the wrong line.
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Below 40 percent gross is fragile. For a physical-product store the working floor sits in the 40s. Under 40, a single freight increase or a bad returns month can wipe out the order.
Is gross margin telling you the truth?
Three margins measure three different things, and DTC brands lose money watching only the first one.
|
Margin |
Takes out |
Tells you |
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Gross margin |
Product cost only |
Whether the product is priced right |
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Contribution margin |
Plus shipping, fulfillment, fees, returns |
Whether an order makes money |
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Net margin |
Plus all fixed overhead and tax |
Whether the business makes money |
Contribution margin is revenue minus every variable cost tied to the order. For an online store, it is the number that tells you whether an order made money. A 60 percent gross margin can turn into a 20 percent contribution margin once a heavy parcel, a 3PL fee, and a payment processor take their cut.
Two products with the same gross margin can contribute different amounts once shipping weight and return rates differ.
Your contribution margin is the most you can pay to acquire a customer and still make money on the order. Keep it high enough that your customer acquisition cost (CAC) still leaves profit on the first sale, or soon after through repeat purchases, and watch it per product, not just as a blended average.
As a working target, we want contribution margin to hold above 30 percent before a store scales paid acquisition. Below that, the first order rarely covers the cost to win the customer, and the account leans on repeat purchases to get there.
Get your reporting to show contribution margin per order and per product. If it can't, that is usually an analytics and reporting gap to close before you touch pricing.
View from the Shopify Analytics Dashboard showing Gross Profit
How to improve your gross margin
The levers below are ranked by how fast they move the number for most stores.
1. Fix your COGS figure first
You cannot improve a number you have measured wrong. Build a true landed cost per product that includes unit cost, inbound freight, duties, and handling. Most stores that think they have a margin problem have a measurement problem, and the fix changes which products they push.
Shopify gives you a head start. The Cost per item field on each product feeds the profit report in Analytics, so gross margin calculates itself once costs are entered. That field usually holds the supplier price alone, not freight, duty, or returns, so Shopify's reported margin sits higher than your real one. Treat it as the ceiling and work down from there.
2. Raise price and cut discounting
Price is the fastest lever because most of a price increase drops to gross margin. Blanket discounts do the opposite, and they stack up. At a 25 percent gross margin, a 1 percent price cut needs about a 4 percent jump in volume just to hold the same gross profit. Before you run another sitewide sale, run that math on your own margin.
3. Shift the product mix
Not every product earns its place. Push the products and bundles that carry the highest contribution margin, and stop giving prime space to low-margin items that only drag the blended number down.
Personalization pays off here. Pointing shoppers toward higher-margin products lifts the mix with no new traffic. Bundles and private-label lines usually carry more margin than resold third-party products.
4. Lower your landed cost
Negotiate supplier terms once you have volume. Combine inbound freight, revisit minimum order quantities, and check whether your customs classification is costing you more duty than it should. A second supplier quote is often the cheapest margin gain on the table.
5. Stop shipping from eating the margin
Free shipping is a conversion tool, not a gift. Set the free-shipping threshold above your margin break-even, price against real carrier rates instead of a flat guess, and match box sizes to products so you stop paying to ship empty space. Shipping is where a healthy gross margin turns into a thin contribution margin.
Set the free-shipping threshold above your margin break-even, so the order still profits once you cover the shipping.
6. Cut your return rate
Returns hit apparel hardest, but they cost margin in every category. Better product-page detail, accurate sizing, honest photography, and real reviews all lower the return rate before an order ships. Many of these are the same fixes that lift conversion.
7. Raise average order value
A higher average order value (AOV) spreads the fixed cost of each order across more revenue, so shipping and payment fees take a smaller share. Post-purchase upsells, thresholds, and bundles all move AOV with no new acquisition spend.
One margin drain sits outside your store. If you also sell on marketplaces, referral and fulfillment fees can take 30 to 45 percent of a sale, a different margin equation from your own site.
Margin is a system, not a setting
Most margin problems trace back to one of two causes: a pricing and mix problem, or a leak in shipping, returns, and fees that never shows up in the headline gross margin. The first is a strategy fix. The second is usually hiding in your data.
Our conversion rate optimization and analytics teams find both. If your margins feel thinner than they should, that is the place to start.
