Beyond revenue: tracking true profit in e-commerce

Revenue is a vanity metric

Revenue feels good to track. It goes up, you feel successful. It’s easy to measure and easy to understand. But revenue alone tells you almost nothing about whether your business is actually healthy.

A business doing $1M in revenue might be highly profitable or hemorrhaging cash. Without tracking profit metrics, you won’t know which until it’s potentially too late.

Why revenue misleads

Revenue growth can hide serious problems.

The growth trap:

You can grow revenue by spending more on ads, offering deeper discounts, or selling lower-margin products. Revenue goes up. Profit might go down. If you only watch revenue, you miss the warning signs.

The discount illusion:

A 20% off sale might boost revenue 30%. But if your margins were 40%, that discount cut your profit per order in half. Revenue looks great; economics got worse.

The product mix shift:

If customers shift toward lower-margin products, revenue might stay flat while profit declines. Revenue alone won’t surface this problem.

Gross profit: the first real metric

Gross profit subtracts the direct cost of goods sold from revenue.

The calculation:

Revenue minus cost of goods sold (COGS) equals gross profit. COGS includes product cost, inbound shipping to your warehouse, and packaging materials.

Why it matters:

Gross profit tells you what you actually have to work with after paying for inventory. A $100 order with $60 COGS leaves $40 gross profit. That $40 has to cover everything else.

Gross margin:

Gross profit divided by revenue gives gross margin percentage. Track this over time. Declining gross margin indicates cost increases or mix shifts toward lower-margin products.

Contribution margin: the order-level truth

Contribution margin goes further, subtracting variable costs associated with each order.

What to subtract:

COGS plus outbound shipping costs plus payment processing fees plus pick-and-pack fulfillment costs. These costs occur with every order.

The calculation:

Revenue minus all variable costs equals contribution margin. This is what each order actually contributes to covering fixed costs and generating profit.

Why contribution margin matters:

An order might have positive gross margin but negative contribution margin once you add shipping, processing, and fulfillment. You could be losing money on every order while showing healthy gross margins.

Understanding fixed costs

Fixed costs don’t change with order volume. They exist regardless of how much you sell.

Common fixed costs:

Rent or warehouse lease. Salaries. Software subscriptions. Insurance. These costs continue whether you ship 100 orders or 10,000.

Why fixed costs matter:

Your contribution margin must cover fixed costs before you make any profit. If contribution margin per order is $15 and monthly fixed costs are $30,000, you need 2,000 orders just to break even.

Operating profit: the real bottom line

Operating profit subtracts fixed costs from total contribution margin.

The calculation:

Total contribution margin minus fixed costs equals operating profit. This is what your business actually makes from operations.

What it tells you:

Positive operating profit means your business generates money from selling products. Negative operating profit means you’re losing money on operations regardless of revenue growth.

Marketing costs complicate the picture

Where do marketing costs fit? It depends on how you think about them.

Variable marketing:

Performance marketing (paid ads) often scales with revenue. More spending, more orders. Some businesses treat this as a variable cost in contribution margin.

Fixed marketing:

Brand marketing, content creation, and some marketing overhead is more fixed. It happens regardless of order volume.

Separating the two:

Consider tracking contribution margin both with and without performance marketing costs. This shows you order-level economics before and after customer acquisition spending.

Why tracking profit matters for decisions

Profit metrics enable better decisions than revenue alone.

Product decisions:

Which products should you promote? Profit metrics reveal which products actually make money, not just which sell well.

Channel decisions:

Which marketing channels are worth the investment? Profit-adjusted channel analysis might show that your highest-revenue channel is actually your lowest-profit channel.

Pricing decisions:

Can you afford to offer free shipping? Profit metrics reveal the true cost of shipping subsidies.

Building profit tracking

How do you actually track profit in e-commerce?

Product-level COGS:

You need accurate cost data for every product. This requires maintaining cost records and updating them when costs change.

Order-level cost assignment:

Assign variable costs to each order. Shipping costs, payment fees, and fulfillment costs should attach to individual orders.

Regular calculation:

Calculate contribution margin and operating profit at least monthly. More frequent is better for fast-moving businesses.

Common profit tracking mistakes

Avoid these errors when tracking profit.

Ignoring returns:

A returned order often has negative contribution. You paid shipping twice, paid processing fees, and might have damaged or unsellable inventory. Returns hurt profit more than they reduce revenue.

Missing costs:

Small costs add up. Payment processing, packaging materials, and fulfillment fees might each seem minor but collectively represent significant margin erosion.

Using averages inappropriately:

Average contribution margin can mask wide variation. Some products or orders might be highly profitable while others lose money. Track the distribution, not just the average.

Profit metrics to track

Focus on these profit metrics:

Gross profit and gross margin. Contribution margin per order. Contribution margin percentage. Operating profit and operating margin. Profit by product and category. Profit by channel. Return impact on profitability. Monthly and trending profit over time.

Revenue shows activity. Profit shows health. Track both, but let profit guide your decisions.