How to Calculate Profit Margins for Your Online Business

You just had your best month ever. $10,000 in sales! Time to celebrate, right?

Hold on. How much of that $10,000 did you actually keep? After payment processor fees, platform fees, ad spend, refunds, software subscriptions, and that surprise chargeback, you might have kept $6,000. Or $4,000. Or honestly, you're not really sure.

Welcome to the most dangerous misconception in online business: confusing revenue with profit.

Revenue vs Profit: Why Most Entrepreneurs Get This Wrong

Let me be blunt: your revenue number means nothing. It's a vanity metric that makes you feel successful while your bank account tells a different story.

Revenue is what customers pay you. Profit is what you get to keep.

The difference? Everything it costs to run your business:

Payment processor fees (Stripe, PayPal, Gumroad)
Platform fees (Shopify, WooCommerce, marketplace cuts)
Advertising spend (Meta, Google, TikTok)
Software subscriptions (email tools, analytics, hosting)
Cost of goods (if physical products)
Refunds and chargebacks
Shipping costs
Transaction fees

The Real Profit Formula

Here's the formula you should be tracking:

Gross Profit = Revenue - Cost of Goods Sold (COGS)

Net Profit = Gross Profit - Operating Expenses - Fees - Refunds

Let's break that down:

Revenue

Total sales before anything is subtracted.

COGS (Cost of Goods Sold)

What you pay for the product:

Manufacturing/wholesale cost
Shipping to you
Storage/warehouse fees
Product packaging

Operating Expenses

Marketing and advertising
Software subscriptions
Email service provider
Web hosting
Virtual assistants/contractors
Office supplies

Fees

Payment processing (2.9% + $0.30 for Stripe)
Platform fees (2% for Shopify, 10% for Gumroad, etc.)
App subscriptions
Chargeback fees

Refunds

This is where it gets painful:

You lose the product cost
You lose shipping both ways
You DON'T get payment processing fees back

If you have a 20% refund rate, you're bleeding fees on every refund.

How to Calculate Your Real Profit Margin

Profit Margin = (Net Profit / Revenue) × 100

Let's use a real example:

A Shopify store doing $50,000/month:

Revenue: $50,000
COGS: $15,000 (30%)
Stripe fees: $1,600 (3.2%)
Shopify + apps: $300
Ad spend: $10,000 (20% of revenue)
Refunds: $3,000 (6% of revenue, but you keep the product cost)
Other expenses: $1,000

Net Profit = $50,000 - $15,000 - $1,600 - $300 - $10,000 - $3,000 - $1,000 = $19,100

Profit Margin = ($19,100 / $50,000) × 100 = 38.2%

That's actually pretty good! But many entrepreneurs would just see "$50,000 revenue" and not realize their actual take-home is less than $20,000.

What's a Good Profit Margin?

It depends on your industry:

SaaS (Software): 70-90% gross margin, 20-40% net margin

Digital Products: 85-95% gross margin, 40-60% net margin

Ecommerce (Physical Products): 30-50% gross margin, 10-20% net margin

Services/Consulting: 60-80% gross margin, 30-50% net margin

If you're below these ranges, something needs to change:

Raise prices
Lower cost of goods
Reduce refund rate
Optimize ad spend
Cut unnecessary software subscriptions

How to Track Profit (Not Just Revenue)

Stop checking your revenue dashboard. Start tracking:

Daily net profit - What did you actually keep yesterday?
Profit per product - Which products are most profitable after fees?
Customer acquisition cost vs lifetime value - Are you spending more to acquire customers than they're worth?
Effective fee rate - What are you really paying in processing fees?

Your Action Plan

This week:

Calculate your real profit from last month (revenue - all costs)
Find your profit margin (net profit / revenue × 100)
Identify your biggest cost - Where is the money going?
Set up automatic tracking so you always know your numbers

Stop celebrating revenue. Start optimizing for profit.

Ready to automate your profit tracking? Get started with ProfitClear →